Credit
What is credit?
an agreement between two parties in which one party lends money or provides goods or services to another party with the understanding that payment will be made at a later date
What is an Annual percent rate (APR)?
the annual cost of credit charged by a lender
What is a proprietary credit card?
A credit card that can only be used in the stores of the company that issued the card.
What do businesses use for short-term credit needs
A bank-issued card such as Visa or MasterCard
Describe the relationship between the creditor and the debtor
The creditor is the party that the borrowed money is owed to.
The Debtor is the party that has borrowed money from the creditor
What are the different types of credit?
Closed-end credit, Opened-end credit
What 3 factors are use of credit primarily based on?
Interest rate charged, Amount of credit used, Length of repayment period
Describe a Credit Policy?
A written set of guidelines used by an organization to determine how many and which customers will be approved for credit
What are the different type of business credit?
Supplier Financing and Bank Financing
What is the formula used to calculate simple interest?
Principal (P) * Rate (R) * Time (T) = Interest
What is closed-end credit?
a loan for a specific amount that must be repaid with interest by a specified date or according to a specified schedule
Describe the two parts of the financial charge for the use of credit. (Interest and Fees)
Interest rate represents the cost of the loan and is expressed as a percent of the amount borrowed.
Fees include items such as application fees and other necessary processing costs
What are the 3 C's of Credit?
Character, Capacity, and Capitol
What are the 5 C's of Banking?
Cash Flow, Capacity, Capitol, Collateral, and Conditions
Why is credit important in economy?
It provides consumers, businesses, and government additional buying power needed to support production and distribution of products
What is opened-end credit?
an agreement that allows the borrower to use a specific amount of credit over a period of time
What do credit laws do?
address finance charges late fees, cash advances, and other issues to protect consumers
What does a credit report show?
A record of credit history and financial behavior for a business or an individual
The buyer has 30 days from the date of purchase to pay the net amount of the purchase
Describe some rewards of extending credit to customers
Generation of Sales, Customer Loyalty, Convenience
What benefits does credit provide?
Ability to use goods and services, opportunity to buy expensive items, source of funding for emergency, and convenience
What could possibly happen if you over use your credit card without being able it pay it back?
Risk late payments, low credit scores, and even bankruptcy
Describe the 3 C's of Credit
Character- current debt, payment history, and credit scores are used to determine the financial character
Capacity- Lenders review finances to determine if the individual receives a regular paycheck and to confirm length of employment
Capitol- All of an individual's assets and liabilities are evaluated to determine net worth
Describe the 5 C's of Banking
Capacity- The ability of a business to repay a loan
Capitol- The owner's investment in the business
Collateral- The property a business used to secure a loan
Conditions- the overall environment in which businesses operate
When is it acceptable to use credit?
When you know based on an individual or a companies history that you can pay off the amount in a timely manner in order to keep your credit score up and prevent yourself or a business from going into debt.