1. 5.01 Understand credit management.

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

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

4. Charge Accounts Regular Accounts Budget 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

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 doesn’t have to be the FULL payment
A finance charge is added if the total bill is not paid (total dollar amount spent plus interest)

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

7. Credit Cards Travel/Entertainment Oil Company Retail Store
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, Kohl’s

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

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

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

11. Business Disadvantages for Using Credit
Experiencing theft of customer records/databases
Overbuying by employees
Overusing credit

12. Cost of Credit Interest (I) The cost of using someone else’s 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

13. Cost of Credit Simple Interest I=P*R*T Time in Years Time in Months
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

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

15. Cost of Credit Decreasing Loan Payments Calculation:
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 1/12th of a year
Interest Rate for 1 month = Annual Interest Rate / 12
Monthly Payment = Interest + Loan Repayment

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

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