M5: Sources and Classifications of Credit

• Credit transaction between two parties in which one (the creditor or lender) supplies money, goods, services, or securities in return for a promised future payment by the

  other (the debtor or borrower). Such transactions normally include the payment of interest to the lender. Credit may be extended by public or private institutions to finance business activities, agricultural operations, consumer expenditures, or government projects (Lotha, 2020).
• Most modern credit is extended through specialized financial institutions, of which commercial banks are the oldest and most important. In present-day industrial economies, the banks are able to extend and increase the supply of credit by the creation of new deposits for their loan customers.
• Credit --- trust given to another person for future payment of a loan, credit card balance, etc.

  TWO TYPES OF CREDIT:

  Consumer Credit--- credit used by people for personal reasons.

  Commercial Credit--- credit used businesses.
• Advantages of Credit

  • Current use of goods and services

  • Permits purchase when funds are low

  • Convenient when shopping

  • Flexible payment terms

  • Opportunity to increase credit line

  • Safer than cash

  Disadvantages of Credit

  • Tend to overspend

  • Can create long-term financial problem and

  slow progress toward financial goals.

  • Potential loss of merchandise due to default

  payment.

  • Ties up future income
• Consumer Credit is the use of credit for personal needs. There are two types of consumer credit: Open-end Credit and Closed-end Credit.
• OPEN-END CREDIT

  Credit as a loan with a certain limit ona the amount od money you can borrow for a variety of goods and services.

  The maximum amount of money a creditor will allow

  a credit user to borrow.

  Examples:

  • Department store credit cards.

  • Bank credit cards (Visa or Mastercard)

  You can use your credit card to make as many

  purchases as you wish, as long as you don’t exceed

  your line of credit.
• CLOSED-END CREDIT

  Credit as a one-time loan that will pay back over a

  specified period of time in payments of equal

  amounts.

  Closed-end credit is used for a specific purpose and

  involves a definite amount of money.

  Examples:

  • Mortgage

  • Car loans

  These types of loans usually carry lowe interest rates

  than open-end credit carries.
• SOURCES OF CREDIT: 

  • Individual money lenders – These are informal person/s who may lend surplus to those in need so that it will bring some income to the borrowers.

  • Retail stores - Easily the biggest source of merchandise credit in the Philippines. This becomes evident when one takes into account the number of such stores in every communities.

  • Pawnshops – The present-day pawnshops came from Montes Pietatis means capital accumulation. In the Philippines, pawnbroking is one of the oldest institutions.
• SOURCES OF CREDIT:

  • Various types of Banks such as commercial banks, savings banks, rural banks, investment banks and

  more – These banks are engaged in the grant of loans not only to businesses, but also to individuals for

  personal purposes (Miranda, 2014).
• TYPES OF CARDS

  • Debit cards allow you to electronically subtract money from your savings or checking account to pay for goods or services.

  • Credit cards such as bank credit cards, travel and entertainment credit cards and retail credit cards are issued by a financial institution use for credit transactions if running out of funds.
• Using a Credit Card Properly

  • Only use when there is no doubt about ability to pay-off the charges at the end of the billing cycle.

  • Record all expenses and keep receipts.

  • Check the credit statement for errors.

  • Always pay off balance completely and timely.
• Results of Overuse

  • Garnishment of Wages – Money can be deducted from wages for money owed.

  • Repossession – Loss of property because of failure to repay loan.

  • Bankruptcy – A legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.
• Process of Obtaining Credit

  1. Credit Application – Form which person provides information needed by a lender to make decisions about granting credit or approving a loan. The borrower will be providing information and necessary documents such as salary, employer, outstanding credit, assets, etc.
  2. Documentation – Creditor will collect and verify necessary documentation for the extension of credit such as bank statements, statements of account, etc.
• Process of Obtaining Credit

  3. Processing – Evaluating credit worthiness such as considering the capacity, character, collateral, credit history, capital and credit limit.

  4. Underwriting – Reviewing loans for soundness and consumer reporting agencies with the help of credit evaluators: Equifax, Experian, and TransUnion.

  5. Closing – Representative explains the terms of credit.

  6. Funding – Creditors will issue credit/funds to the debtor.
• GENERALIZATION:

  Credit is an essential part of various ventures and many households. Businesses use credit, households use credit and even several countries use credit. However, in order for a credit system to function properly, debts owed must be paid. When those debts fall behind, it is necessary to employ tactics to collect on owed debts.
• GENERALIZATION:

  Establishing appropriate credit policies without exception and collection procedures is vital to the success of any small business. As their customer base builds, and more and more customers want to pay by credit, they realize that they need to open up a credit card account or offer credit terms.