5.01 Understand credit management. Credit Management Slide 2
Main Types of Credit Credit: An agreement to obtain money, goods or
services now in exchange for a promise to pay in the future Main
Types of Credit Charge Accounts Credit Cards Installment Credit
Consumer Loans Slide 3 Charge Accounts A charge account represents
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. Examples Regular
Accounts Budget Accounts Revolving Accounts Slide 4 Charge Accounts
Regular Accounts Requires the buyer to make a full payment within a
stated period Used for everyday needs and small purchases Example:
charge account with an electrician who re-wired a house Budget
Accounts Requires that a customer make payments of a fixed amount
over several months Example: A charge account with Progress Energy
utility company Slide 5 Charge Accounts Revolving Accounts Most
popular form of sales credit Charge purchases at any time, but only
part of the debt must be paid each month A credit limit is set for
the maximum amount to be spent Payments are required once a month,
but it doesnt have to be the FULL payment A finance charge is added
if the total bill is not paid (total dollar amount spent plus
interest) Slide 6 Credit Cards Credit cards allow debtors
(customers) to receive goods and services from suppliers (creditor)
using credit cards and pay for them later. Types of credit cards
Bank A bank will pay the business (taking liability for payment)
Customers are required to pay a fee for using the credit card
Examples MasterCard, VISA Slide 7 Credit Cards Travel/Entertainment
Pay a yearly membership fee Expected to pay the full balance each
month Examples: American Express, Diners Club Oil Company Examples:
BP Oil, Exxon Retail Store Cards offered by a particular store
Examples: Belk, Kohls Slide 8 Installment Credit Installment sales
credit is a contract issued by the seller that requires
intermittent payments at specified times such as bi-weekly or
monthly. Customers are required to make a down payment which is a
portion of the entire purchase. Most often used for furniture and
household appliances Examples: Rooms to Go Furniture Slide 9
Consumer Loans A consumer loan is when a buyer agrees to make
monthly payments in specific amounts over a period of time. The
loaner receives money up front and agrees to pay the price back in
full plus interest The lender needs some assurance that the loaner
will pay the money back. Promissory note Collateral (property used
as security) Cosigner Slide 10 Business Advantages for using Credit
Establishing a favorable credit rating Keeping business separate
from personal expenses Minimizing record-keeping and receipts
Keeping track of what employees are spending Earning rewards Slide
11 Business Disadvantages for Using Credit Experiencing theft of
customer records/databases Overbuying by employees Overusing credit
Slide 12 Cost of Credit Interest (I) The cost of using someone
elses money Principal (P) Amount of the loan Interest Rate (R)
Percent of interest charged or earned Time (T) The length of time
for which the interest will be charged Expressed in years Slide 13
Cost of Credit Simple Interest I=P*R*T Time in Years Multiply by
the number of years Time in Months Divide the number of months by
12 Time in Days Divide the number of days by 360 Slide 14 Cost of
Credit Installment Interest: When a loan is repaid in partial
payments Calculation: Calculate out how much interest you owe I = P
x R x T Calculate the total cost of the loan Total Cost = P + I
Determine the number of payments Based on how often you are
required to make payments Generally, you make monthly payments #
payments = # years * 12[because there are 12 months/yr] Calculate
your payments Payments = Total Cost / # of payments Slide 15 Cost
of Credit Decreasing Loan Payments Interest is calculated on the
amount that is unpaid at the end of each month Calculation:
Interest is calculated on the amount of the loan that is unpaid.
Interest = Unpaid Balance * Interest rate Remember: The amount of
interest is based on the portion of the year. 1 month is 1/12 th of
a year Interest Rate for 1 month = Annual Interest Rate / 12
Monthly Payment = Interest + Loan Repayment Slide 16 Cost of Credit
Maturity Date The date on which a loan must be repaid Months The
maturity date is the same day of the month that the loan was made
Example: One month loan on January 15 will be due on February 15
Days Determine the day the loan was made, and then count the exact
number of days of maturity Example: A 90-day loan made on March 4
will be due on June 2 Slide 17 Cost of Credit Annual Percentage
Rate (APR) A disclosure required by law on all credit agreements
States the percentage cost of credit on a yearly basis Also
includes service fees
