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5.01 Understand credit management.

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Presentation on theme: "5.01 Understand credit management."— Presentation transcript:

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

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