Definition of 'Credit': Joana Rey P. Palabyab Credit and Collection BSBM - Fm3A Ms. Luisita Marzan

Joana Rey P.
Palabyab BSBM FM3A
Credit and Collection Ms. Luisita Marzan
Definition of 'Credit'
1. A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company. 2. An accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. On the company's income statement, a debit will reduce net income, while a credit will increase net income.
Different kinds of Credit

Non-Revolving Credit Non-revolving lines of credit are also known as installment agreements. This type of account requires you to pay a fixed monthly amount (or more), until the principal is paid off in full at which point the account is closed. Mortgage, auto and student loans are examples of non-revolving credit lines. Revolving Credit Monthly payments on revolving lines of credit, such as credit and department store cards, fluctuate based on how much credit you have used and how much you choose to pay off each month. Secured Credit Secured credit refers to loans secured by an asset, such as your home or car. This type of credit is considered a safer risk on behalf of lenders. Reason being: if you default on your auto loan, the lender has the legal right to repossess your car. Unsecured Credit Unsecured credit, in contrast, does not involve putting down collateral to obtain financial resources. This type of debt typically refers to credit and retail cards. Carrying too high of a debt-to-credit ratio will cause your credit score to suffer. Short-Term Loan A pay-day loan is a short-term cash advance secured by your next paycheck. This is an example of a risky type of credit, namely because they come with sky-high interest rates, which often trap borrowers into a dangerous cycle of debt. If you are forced to take out a short-term loan, make sure you pay it off as soon as you can to avoid falling further into debt and damaging your credit score.
Importance of Credit in the Economy

Borrowing operations bridge the gap between the expenditure requirements and income receipts in the production economy. The terms of repayment, the cost of credit, the security demanded for it - all these terms and conditions of credit would determine the profitable use of credit. The institution of credit serves to transfer the financial surplus of savers to those who are eager and able to put this purchasing power to use. In the absence of such a mechanism the material resources at the command of this purchasing power might remain unemployed and go waste. The surplus is lent to those borrowers offering the best return, often taking account of all dimensions of the credit contract, including rate of interest, risk and pertinent tax and other official regulations. Credit scoring plays a vital role in economic growth by helping expand access to credit markets, lowering the price of credit and reducing delinquencies and defaults. In the United States, credit scoring helps drive the American economy and makes credit affordable. For consumers, scoring is the key to homeownership and consumer credit. It increases competition among lenders, which drives down prices. Decisions can be made faster and cheaper and more consumers can be approved. It helps spread risk more fairly so vital resources, such as insurance and mortgages, are priced more fairly. For businesses, especially small and medium-sized enterprises, credit scoring increases access to financial resources, reduces costs and helps manage risk. For the national economy, credit scoring helps smooth consumption
during cyclical periods of unemployment and reduces the swings of the business cycle. By enabling loans and credit products to be bundled according to risk and sold as securitized derivatives, credit scoring connects consumers to secondary capital markets and increases the amount of capital that is available to be extended or invested in economic growth.
The Demand for Money

1. Interest Rates Two of the more important stores of wealth are bonds and money. These two items are substitutes, as money is used to purchase bonds and bonds are redeemed for money. The two differ in a few key ways. Money generally pays very little interest (and in the case of paper currency, none at all) but it can be used to purchase goods and services. Bonds do pay interest, but cannot be used to make purchases, as the bonds must first be converted into money. If bonds paid the same interest rate as money, nobody would purchase bonds as they are less convenient than money. Since bonds pay interest, people will use some of their money to purchase bonds. The higher the interest rate, the more attractive bonds become. So a rise in the interest rate causes the demand for bonds to rise and the demand for money to fall since money is being exchanged for bonds. So a fall in interest rates causes the demand for money to rise. 2. Consumer Spending This is directly related to the fourth factor, "Demand for goods goes up". During periods of higher consumer spending, such as the month before Christmas, people often cash in other forms of wealth like stocks and bonds, and exchange them for money. They want money in order to purchase goods and services, like Christmas presents. So if the demand for consumer spending increases, so will the demand for money. 3. Precautionary Motives If people think that they will suddenly need to buy things in the immediate future (say it's 1999 and they're worried about Y2K), they will sell bonds and stocks and hold onto money, so the demand for money will go up. If people think that there will be an opportunity to purchase an asset in the immediate future at a very low cost, they will also prefer to hold money. 4. Transaction Costs for Stocks and Bonds If it becomes difficult or expensive to quickly buy and sell stocks and bonds, they will be less desirable. People will want to hold more of their wealth in the form of money, so the demand for money will rise. 5. Change in the General Level of Prices If we have inflation, goods become more expensive, so the demand for money rises. Interestingly enough, the level of money holdings tends to rise at the same rate as prices. So while the nominal demand for money rises, the real demand stays precisely the same. 6. International Factors Usually when we discuss the demand for money, we're implicitly talking about the demand for a particularly nation's money. Since Canadian money is a substitute for American money, international factors will influence the demand for money. Factors Which Increase the Demand for Money 1. A reduction in the interest rate. 2. A rise in the demand for consumer spending. 3. A rise in uncertainty about the future and future opportunities. 4. A rise in transaction costs to buy and sell stocks and bonds. 5. A rise in inflation causes a rise in the nominal money demand but real money demand stays constant. 6. A rise in the demand for a country's goods abroad. 7. A rise in the demand for domestic investment by foreigners. 8. A rise in the belief of the future value of the currency. 9. A rise in the demand for a currency by central banks (both domestic and foreign).
History of Credit
The idea of exchanging goods or services in return for a promise of future payment developed only after centuries of trade: money and credit were unknown in the earliest stages of human history. Nevertheless, as early as 1300 B.C., loans were made among the Babylonians and Assyrians on the security of mortgages and advance deposits. By 1000 B.C., the Babylonians had already devised a crude form of the bill of exchange, so a creditor merchant could direct the debtor merchant in a distant place to pay a third party to whom the first merchant was indebted. Installment sales of real estate were being made by the Egyptians in the time of the Pharaohs. Traders in the Mediterranean area, including Phoenicia, Greece, Rome and Carthage, also used credit. The vast boundaries of the Roman Empire, at the beginning of the Christian era, encouraged widespread trading and a broader use of credit. In the disorganized period that marked the decline and fall of the Roman Empire, credit bills of exchange or promissory notes were widely used to reduce the dangers and difficulties of transferring money through unorganized trading areas. During the Middle Ages, a period which spanned 1000 years from about 500 to 1500 A.D., credit bills were essential to the trading activities of the prosperous Italian city-states. Lending and borrowing, as well as buying and selling on credit, became widespread practices; the debtor-creditor relationship was found in all classes of society from peasants to nobles, even including the Pope and other high dignitaries of the Church. A common form of investment and credit, especially in Italy, was the "sea loan" whereby the capitalist advanced money to the merchant and thus shared the risk. If the voyage was a success, the creditor got the investment back plus a substantial bonus of 20 to 30 percent; if the ship was lost, the creditor could lose the entire sum. Another form of credit was the "fair letter" which was developed at the fairs held regularly in the centers of trading areas during the Middle Ages. The fair letter amounted to a promissory note to be paid before the end of the fair or at the time of the next fair. It enabled a merchant, who was short of cash, to secure goods on credit. This gave the merchant time either to sell the goods brought to the fair or to take home and sell the goods that had been purchased on credit.

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Definition of 'Credit': Joana Rey P. Palabyab Credit and Collection BSBM - Fm3A Ms. Luisita Marzan

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Joana Rey P.

Palabyab BSBM FM3A

Credit and Collection Ms. Luisita Marzan

Different kinds of Credit

Importance of Credit in the Economy

The Demand for Money

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