Tanguilan, Clearm M. BSA III – St.

Simon Finance I July 30, 2016

1. What is credit?
-A journal entry recording an increase in assets. With cash basis accounting, credits are recorded when income is
received. With accrual basis accounting, credits are recorded and recognized when income is earned. Compare to Debit.
-A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some
later date.
-The borrowing capacity of an individual or company.

2. Elements of credit
a. Debt History - One of the main factors that goes into a person's creditworthiness is his history of paying back -- or not
paying back -- loans in the past.
b. Income - A person who has a large income or significant savings is considered a stronger candidate to lend to than a
person who does not have a large income, as the poorer person does not have the same access to funds. A person with a
larger income will also have access to larger loans.
c. Current Debt - A lender must also look at the number of loans that a person currently has out. It a person has a large
number of loans out right now, then he may be at a higher risk of default, as any lender who offers him a new loan may
be last in line to be paid back.
d. Collateral - Finally, loans can be split into two main types -- secured and unsecured. A secured loan is a loan that is
backed by some form of collateral, an asset that the lender can seize in the event that the borrower defaults.

3. Characteristics of credit
a. Poor credit risk.
b. Credit is the use of trust.
c. Credit is elastic.
d. Credit involves time or futurity.
e. Credit gives rise to creditor.

4. Foundation of credit
NFCC – National Foundation for Credit Counseling. The NFCC, also known as the National Foundation for Credit
Counseling, Inc., is a nationwide organization of credit counseling agencies that provides certification for counselors,
educational curriculum support, and standards of conduct for its member agencies.

5. C’s of credit
a. Character - Will the client be willing to repay the loan? Does the client have a sense of responsibility for his/her
obligations? How has this sense of responsibility been demonstrated?
b. Capacity - Will the client be able to repay the loan? What are the financial circumstances of the client? Has the client
thought about or reviewed their budget to determine his/her ability to repay the loan?
c. Collateral (i.e. down payment or equity) - Collateral may make the loan safe, but not necessarily sound. Provides
incentive for client to repay the loan. Provides a means of at least partial recovery if a loan defaults. Collateral should not
be considered as a source of repayment.
d. Capital - Provides a cushion for repayment in the event of the client having a financial setback. Indicates an ability and
willingness of the client to save and accumulate assets.
e. Credit - Represents accumulated experience of the client’s habits in performing credit obligations. Provides a record of
past credit experience.

6. Classifications of credit according to:

a. USER
  Consumer credit - Consumer credit also called consumption credit is that kind of credit extended to consumers in
order to facilitate the process of consumption.
 Retail credit - Is a typical example of consumer credit, which is held synonymous with one another, as with
personal credit, the use of which is obtained through charge account and installment credit
 The use of the credit card - Card which work on the principle of letting a person acquire goods and services on
pledge that it shall be paid for a later date is greatly facilitated today through the introduction of credit card.
 Replevin - When an article is sold under an installment contract, and there buyer later fails to live up to his part
of the contract, the seller, in order to protect himself from loss, has the right to repossess the article.
b. PURPOSE
 Investment Credit - capital are on credit first; more on buying properties
 Agricultural Credit- for farm improvement (usu. farmers only); loan for acquisition of farm utilities.
 Export Credit - 4 parties: exporter, local bank, importer and local bank of the importer; need capitalization;
payment is only bank to bank.
 Real Estate Credit - same with investment but limited to house and lots.
 Industrial Credit - for purposes of mining, fishing, factories (usu. businessmen); excludes farmers.
c. MATURITY
 Long Term Credit - From 3 to 5 years period is considered the long term credit. Long term credit is required for
capital, such as building and machinery.
 Intermediate Credit - normally issued for one to three years. It used for the purchase of machinery, furniture etc.
by the firms.
 Short Term Credit - the period of short term credit is ordinary less than one year. This credit is used for the
purchase of raw material and to make the payment of labor, advertisement, light and power etc.
 Demand Credit - is payable on demand. The firm cannot use it for fixed assets. Demand credit is generally used by
the commercial bank to finance the brokers.
d. FORM

 Non-Revolving Credit - 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.
 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 - 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.
 Unsecured Credit - does not involve putting down collateral to obtain financial resources. This type of debt
typically refers to credit and retail cards.
 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.

6. Sources of credit
 Individual Money Lenders - individual money lender who may lend his surplus to those in need so that it will
bring some income to him.
 Retail Store - easily the biggest source of merchandise credit in the Philippines is the retail store, more
particularly known as the “sari-sari” store.
 Pawnshops - present-day pawnshops owe their origin from the Montes Pietatis which were established by
Franciscans (Friar Minor as they were invariably called then) in Italy. The terms mons referred to any form of
capital accumulation and pietatis from the Latin “pietas” meaning pious.