Essential Standard 5.00. Understand business credit and risk management. Objective 5.01. Understand credit management. Topics. Main types of credit Common advantages and disadvantages of businesses using credit Cost of credit Main factors examined for granting credit Credit documents
Understand business credit and risk management.
Understand credit management
Main types of credit
Common advantages and disadvantages of businesses using credit
Cost of credit
Main factors examined for granting credit
Credit used by people for personal reasons.
Credit used by businesses.
Charge account is a contract between creditors and debtors. Charge accounts allow debtors (customers) to receive goods or services from suppliers (creditor) and pay for them at a later date.
Charge Accounts – most common type of short- term or medium-term credit.
Credit cardsallow debtors (customers) to receive goods and services from suppliers (creditor) and pay for them later.
Travel and Entertainment
Bonds – written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor.
Trade credit: a company receives goods from a supplier and pays for them later
Loan credit: borrowing money for a specific purpose
Sales credit: Charge a purchase at the time you buy a good or service
Finance charge: Total $$ cost of credit including interest and all charges
Down payment: payment of part of the purchase price usually made at the time of purchase
Installment loan: borrower agrees to make monthly payments in specific amounts over a period of time
Promissory note: a written promise to repay based on a debtor’s excellent credit history
Collateral: aka security; property that is used as security for a loan; the lender has the right to sell the property to get back the amount of the loan if you default or don’t repay it
Cosigner: person responsible for payment of the note if the signer doesn’t pay as promised
Repossession = Loss of property because of failure to repay loan.
Bankruptcy = Legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of its current assets.
The Credit Card Song by Old Man Pie
I = P x R x T
= 500 x 7% x 3 months
Percentage cost of credit
Calculate Maturity Date Activity
Converting Time and Percents Activity
Simple Interest Activity
Installment Interest Activity
Level loan payment schedule, Example
Creditors examine several factors about potential debtors when deciding whether to grant them credit, such as…….
The Four C’s of Credit
Statement of account
Credit Regulations: exist to protect rights of credit applicants and rights of credit users from fraudulent and unfair practices.
Fair Credit Billing Act requires creditors to correct billing mistakes promptly.
Fair Credit Reporting Act allows individuals to scrutinize any information shared by credit reporting agencies with potential creditors and employers. Individuals also may correct any incorrect credit information.
Consumer Credit Reporting Reform Act requires that the credit reporting agency must be able to prove that credit information they provide is accurate.
Fair Debt Collections Actprohibits deceptive, harassing, and unfair practices for collecting debt from debtors.
Credit Card Accountability, Responsibility, and Disclosure Actis an amendment to the Truth in Lending Act. The act institutes fair and transparent practices of providing credit.
FTC: Federal Trade Commission enforces laws on credit
Some practices instituted by the CARD Act are:
Kept on file with credit bureau for 10 years.
Affects credit rating, future extensions of credit, loss of jobs, etc.
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