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Understand credit management
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What is credit? Credit is the privilege of using someone else’s money for a period of time.
Who uses credit?◦ Individual people◦ Businesses◦ Government
Main types of credit for individuals◦ Charge Accounts◦ Credit Cards◦ Installment Credit◦ Consumer Loans
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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.
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◦ Types and examples of Charge Accounts: Regular
Buyer required to make full payment within a stated period of time. Usually 25 to 30 days.
Example - A charge account with an electrician who re-wired a house Budget
credit agreement which requires customers to make payments of a fixed amount over several months
Example - A budget plan (charge account) with Duke Energy utility company
Revolving Customers may charge purchases at any time, but only part of the
debt must be paid each month. Several features: credit limit (max amount may be charged);
finance charge. Can lead customer to overspend! Example – MasterCard, Visa, Home equity credit line
Credit cards allow debtors (customers) to receive goods and services from suppliers (creditor) using credit cards and pay for them later.
◦ Types and examples of credit cards: Bank (multi-use credit card)
MasterCard and VISA Travel and entertainment
American Express, Carte Blanche, and Diners Club Oil company (single-use credit card)
BP Oil Retail store (single-use credit card)
Belk
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Installment sales credit - a contract issued by the seller that requires intermittent payments at specified times such as bi-weekly or monthly.
Differs from credit cards in the following ways:◦ Must sign a sales contract showing terms of purchase◦ Seller has the right to repossess the item purchased on credit◦ Down payment required at the time of purchase◦ Pay finance charge on the amount owed◦ Regular payment schedule is made until the loan is paid off
◦ Examples of Installment Credit Rooms To Go Furniture Store, Aaron’s Rent a Center
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Consumer loans require debtors to make monthly payments of a specified amount for a period of time.
Types of consumer loans:◦ Installment Loans (discussed on previous slide)◦ Single payment loan – repaid in one payment on a
specific date◦ Promissory Note – a written promise to repay a loan.
◦ Example of a consumer loan Borrowing $1,000 from a bank and agreeing to make $100 payments
for ten months
Corporate Bonds – used to finance building and equipment
Small Business Administration Loans – offers a number of financial, technical, and management programs to help business
Municipal Bonds – state and local governments use these to finance projects
US Savings Bonds—sold by federal government
Supplier Credit—used by companies for supplies purchased on a regular basis
Convenience◦ Credit can make it easy for you to buy. You can shop
without carrying much cash.
Immediate Possession◦ Credit allows you to have the item now. A family can buy a
dishwasher on credit and begin using it at once.
Savings◦ Sometimes credit allows you to buy an item on sale at a
good price.
Credit Rating◦ A person’s reputation for paying bills on time.
Useful for Emergencies◦ Access to credit can help in unexpected situations, such as
car repairs.
Overbuying◦ A common spending hazard of credit involves buying
something that is more expensive that you can afford.
Careless Buying◦ Credit can tempt you to not wait for a better price on an
item you want now.
Higher Prices◦ Stores that only accept cash may sell items at lower prices
than stores that offer credit. Giving credit to customers is expensive for stores and the results can be higher prices.
Overuse of Credit◦ If you buy too much on credit your monthly payments may
be to much for you to afford. This problem can result in bad credit history, repossession, or loss of home.
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