1. Essential Standard 5.00 Understand business credit and risk management. 1

2. Objective 5.01 Understand credit management 2

3. Topics Main types of credit Common advantages and disadvantages of businesses using credit Cost of credit Main factors examined for granting credit Credit documents Credit regulations Credit assistance 3

4. Main types of credit 4

5. Starter: Define 18-1 Key Terms on Page 450 5

6. Main Types of Credit What is credit? Credit is an agreement to obtain money, goods or services now in exchange for a promise to pay in the future. What is trade credit? Trade credit occurs when a company receives goods from a supplier and pays for them later. 6

7. Main Types of Credit What are the main types of credit? 1.Charge accounts 2.Credit cards 3.Installment sales credit 4.Consumer loans 7

8. Main Types of Credit continued What is a charge account? 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. What are some examples of a charge account? Regular – You pay $20 at the end of a doctor's visit and agreed to pay the balance in 30 days. Budget – You pay prearranged equal payments monthly to Progress Energy. Revolving - Home equity credit line 8

9. Main Types of Credit continued What is a credit card? A Credit card allows debtors (customers) to receive goods and services from suppliers (creditor) using credit cards and pay for them later. What are some examples of a credit card? Bank - Mastercard and VISA Travel and Entertainment - American Express Oil company - BP Oil Retail store - Belk 9

10. Main Types of Credit continued What is an installment sales credit? Installment sales credit is a contract issued by the seller that requires intermittent payments at specified times such as bi-weekly or monthly. What is an example? Shopping at a Rooms To Go furniture store that advertises the option of payments for a period of three years. 10

11. Main Types of Credit continued What is a consumer loan? Consumer loans require debtors to make monthly payments of a specified amount for a period of time. What is an example? Borrowing $1,000 from a bank and agreeing to make $100 payments for 10 months. 11

12. Main Types of Credit continued What is a promissory note? Promissory note – a written promise to repay based on a debtor’s excellent credit history. Why is collateral or a cosigner used? The lender may need some guarantee that you will repay or to know that someone will be responsible for the loan. 12

13. Common advantages and disadvantages of using credit 13

14. Common Advantages of Using Credit Convenience Immediate possession Savings Establishing favorable credit rating Useful for emergencies 14

15. Common Disadvantages of Using Credit Overbuying Careless Buying Higher Prices Overuse of Credit 15

16. Common Advantages of Businesses Using Credit Establishing favorable credit rating Keeping business separate from personal expenses Minimizing record-keeping and receipts Keeping track of what employees are spending Ex: Issuing credit cards to all employees so they could charge necessary products and services that are work- related. Earning rewards 16

17. Common Disadvantages of Businesses Using Credit Experiencing theft of customer records/databases Overbuying by employees Overusing credit 17

18. To Do: 18-1 Key Concepts – Page 456 Credit: Primary or Promoter Product Activity Advantages and Disadvantages of Using Credit Activity 18 Main Types of Credit

19. Cost of credit 19

20. Starter: Define 18-2 Key Terms on Page 457 20

21. Cost of Credit continued What is the cost of using someone else’s money? Interest, I What are the factors for calculating interest? Principal, P = Amount of the loan Interest Rate, R = Percent of interest charged or earned. Time, T = Length of time for which interest will be charged, usually expressed in years or parts of a year. What is the formula for calculating simple interest? I = P x R x T 21

22. Cost of Credit continued How is time determined for a loan for each of the following lengths? Years = multiply by the number of years Months = multiply by the portion of the year. Such as 2 months = 2/12 Days = multiple by the portion of the year. Such as 30 days = 30/360 (1 Years = 360 Days for easier calculation) 22

23. Cost of Credit continued How is the maturity date calculated? Maturity Date = the date on which the loan must be repaid. Months - The maturity date is the same day of the month that the loan was made. Ex: A 1 month loan made on January 15 th will be due on February 15 th. A 2 month loan will be due on March 15 th. Days - Determine the day the loan was made and then count the exact number of days of maturity. Ex: A 90 day loan made on March 4 th will be due on June 2 nd. 23

24. Cost of Credit continued How is a decreasing loan payment calculated? Interest is calculated on the amount of the loan that is unpaid at the end of each month. 24

25. Cost of Credit continued What is APR? Annual Percentage Rate - A disclosure required by law for a credit agreement. What is disclosed in APR? Percentage cost of credit (on a yearly basis) Service fees The time and money it takes a creditor to: Investigate your credit history Process your loan or charge account applications Keep records of your payments and balances 25

26. To Do: 18-2 Key Concepts – Page 461 Maturity Date Activity Converting Time and Percents Activity Simple Interest Activity Installment Interest Activity Choosing the Right Credit Card Activity 26 Cost of Credit

27. Factors and Documents 27

28. Starter: Define 18-3 Key Terms on Page 462 28

29. Factors for Granting Credit The Three C’s of Credit: Character Capital Capacity 29

30. Factors for Granting Credit What is character? Character is: Honesty to pay a debt when it is due. How past debt obligations were handled. What is capacity? Capacity refers to how much debt can comfortably be handled. Not living beyond your means. What is capital? Capital is current available assets that could be used to repay debt if income was to become unavailable. 30

31. Factors for Granting Credit What is a credit application? Is a form used by lenders to obtain information from applicants in order to make a decision about granting credit. Should be filled out completely, accurately, and honestly. Requires signature of applicant, which indicates provided information is true Ex: A Sears Department Store sales associate gives a customer a form to complete in order to apply for a credit card. What is credit data? Credit data make up the information that applicants provide on credit applications. 31

32. Factors for Granting Credit How is credit data verified? Documentation of credit data may be verified by: Employers (former and current) Type of data: Employment dates and salary Financial institutions Type of data: Saving or checking accounts Ex: Capital Bank reported that John has both savings and checking accounts with its financial institution. Personal references Type of data: Manner how personal business is conducted 32

33. Main Factors Examined for Granting Credit continued What is a credit bureau? Credit bureaus sell lenders credit information about credit users. What information do credit bureaus provide? They provide debt records, payment history, and if any action has been taken to collect overdue bills about potential debtors. Ex: Credit reports to other businesses What are the three main credit bureaus? 1.Equifax 2.TransUnion 3.Experian 33

34. Main Factors Examined for Granting Credit continued What is a credit report? Credit report shows the debts you owe, how often you use credit, and whether you pay your debts on time. Your credit report is confidential. That is, only you or those who have a legitimate reason for examining it can obtain it. Ex: ABC Rental Company requires applicants to verify reputation for paying bills in order to determine potential credit risk. Ex: Walden Book Store obtained information about Ann's reputation for paying her bills. 34

35. Credit Contract What is a credit contract? Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services. What should debtors know before signing a credit contract? Debtors should know the content of the credit contract before signing such as: Amount of finance charges Repairs covered Add-on features Reduction of finance charge if contract paid in full prior to ending date Receive the copy of the contract Repossession conditions 35

36. Statement of Account What is a statement of account? A record of the transactions completed during a billing period. Comes monthly once credit is granted and purchases are made on credit. Ex: Chase Mortgage Company sends quarterly summaries of transactions. What kind of information may be found on the statement of account? Balance due Amounts charged or credited during the billing period Current balance Minimum amount of next payment 36

37. To Do: 18-3 Key Concepts – Page 468 Credit Application Content Activity Credit Bureaus Activity Credit Contract Activity Statement of Account Activity 37 Factors for Granting Credit

38. Credit Regulations and Assistance 38

39. Starter: Define 18-4 Key Terms on Page 469 39

40. Credit Regulations Truth in Lending Law requires lenders to reveal the cost of credit (APR and finance charge) and terms before signing an application or contract. The law limits your liability to $50 for unauthorized use of credit cards. Equal Credit Opportunity Act allows credit applications be judged on financial responsibility of credit applicants. The three areas of responsibilities are low income, large debts, and a poor payment record. Ex: JCPenney makes sure all applicants are creditworthy before issuing any of them credit cards. 40

41. Credit Regulations continued 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. Ex: Han sued a furniture store that verified it provided inaccurate information about his credit history. 41

42. Credit Regulations continued 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 Act prohibits deceptive, harassing, and unfair practices for collecting debt from debtors. 42

43. Credit Regulations continued The CARD Act of 2009: Credit Card Accountability, Responsibility, and Disclosure Act is an amendment to the Truth in Lending Act. The act institutes fair and transparent practices of providing credit. 43

44. Credit Regulations continued Some practices are instituted by the CARD Act of 2009 are: Inform customers of increase of cost of credit not less than 45 days prior to effective date. Provides information about how long it would take to pay off a loan if minimum payments are paid. Protects potential credit consumers under the age of 21, who must have a cosigner with a means to repay debt of the consumer. 44

45. Credit Assistance What forms of credit assistance are available? Debt repayment plan Is an agreement between a creditor and debtor that allows the debtor to pay off a debt with more manageable payment plan. Ex: After talking with a Sears customer representative about her overdue balance, Tina implemented a strategy that will minimize her debt. Credit counseling Provides information on actions to take in order to manage debt. Bankruptcy May be used by debtors to reduce debt or amount owed to creditors. 45

46. To Do: 18-4 Key Concepts – Page 473 Credit Regulations and Credit Assistance Activity 46 Credit Regulations