1 CREDIT AND COLLECTION
CREDIT AND COLLECTION
LESSON 1: INTRODUCTION TO CREDIT AND
COLLECTION
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WHAT IS CREDIT?
The word "credit" has many meanings in the financial world, but it most
commonly refers to a contractual agreement in which a borrower receives a sum
of money or something else of value and commits to repaying the lender at a later
date, typically with interest.
Credit can also refer to the creditworthiness or credit history of an
individual or a company—as in "she has good credit." In the world of accounting,
it refers to a specific type of bookkeeping entry.
MEANING OF CREDIT
From the Latin word credo – meaning to believe, to trust.
Means securing something of value, whether tangible or intangible, in return
for a promise to pay at some determined future date.
Creates obligations and rights to both debtor and creditor.
Transaction involving the transfer of goods, services, funds, property or
rights thereby creating an obligation on the part of those who receive them,
that must be complied in the future (creditor and debtor).
FIVE C’S OF CREDIT
1. Character
2. Capacity
3. Capital
4. Collateral
5. Conditions
CREDIT IN LENDING AND BORROWING
Credit represents an agreement between a creditor (lender) and a borrower
(debtor). The debtor promises to repay the lender, often with interest, or risk
financial or legal penalties.
OTHER DEFINITIONS OF CREDIT
"Credit" is also used as shorthand to describe the financial soundness of
businesses or individuals. Someone who has good or excellent credit is considered
less of a risk to lenders than someone with bad or poor credit. Credit scores are
one way that individuals are classified in terms of risk, not only by prospective
lenders but also by insurance companies and, in some cases, landlords and
employers.
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CREDIT DISTINGUISHING FROM DEBT
WHAT IS DEBT?
The term debt refers to money that you have borrowed. It is money you
spent or obtained in some way that you have not yet paid back to the lender. Debt
is what you owe. It's what you have to pay back to the lender. Over time, the
more money you borrow, the higher your debt will climb. The higher it climbs, the
harder it is to repay.
Various types of Debt:
1. Secured Debts
2. Unsecured Debts
CREDITOR AND DEBTOR
CREDITOR
- Creditor is an entity or person that lends money or extends credit to
another party (Connotes trust).
DEBTOR
- Debtor is an entity or person that owes money to another party (The
capacity and willingness to pay).
WHO GIVES CREDIT?
Creditors could be a:
Bank
Credit Union
Any business selling a product or service i.e. auto loans.
The government i.e. student loans.
Credit card companies (backed up by a credit union) i.e. Visa, MasterCard,
etc.
ITEMS THAT ARE BEING LEND/CREDIT
Goods – Groceries, appliances, medicines, hardware.
Services – Car Repair, beauty parlors, electricity.
Funds – Cash loans from pawnshops, banks, lending institutions, and
friend.
Property – Car (Rent a car), beach house (Real property).
Rights – Possessions e.g. stocks, bonds, commercial paper, loan
receivables.
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BASIC ELEMENTS OF CREDIT
It is the ability to obtain a thing of value.
A promise to pay.
Definite sum of money.
Payable on demand or future time.
FUNCTIONS OF CREDIT
Economic function
- Medium of exchange
- To make capital available
Social function
Business promotion
Fair Credit Billing Act – Protects consumers against inaccurate and unfair
credit billing and credit card practices and provides consumers with a
mechanism for addressing billing errors.
Equal Credit Opportunity Act – Prohibits creditors from discriminating
against a credit applicant on the basis of race, color, religion, national origin,
sex, marital status, or age or because the applicant receives public
assistance.
Fair Debt Collection Practices Act – Prevents abusive and deceptive
practices by debt collectors.
Credit Card Accountability, Responsibility, and Disclosure (CARD)
Act – Bans unfair rate increases and unfair fees, requires that credit card
contract terms be presented to consumers in clear language, and ensures
accountability from credit card issuers and regulators.
Advantages of Credit
1. Convenience
2. Use other people’s money
3. Meet emergencies
4. Get something you can’t afford
5. Take advantages of sales
6. Establish a credit history
Disadvantages of Credit
1. Credit almost always costs money
2. It can be a habit of overspending
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3. Overuse of credit leads to poor credit record
4. Extra fees add to the total costs
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