TYPES OF CREDIT
LEARNING OBJECTIVES
To know and fully understand the types of credit
To understand the different concepts theories and
principle of Philippine financial system and its
interrelated components including the necessity of
money and credit
Understanding and appreciation of the importance of
basic financial statements
To show the attributes of excellent, professional,
catholic members of business organization
Consumer Credit
Consumer credit is a debt that a person
incurs when purchasing a good or
service.
Consumer credit includes purchases
obtained with credit cards, lines of credit
and some loans. Consumer credit is also
known as consumer debt.
Consumer credit is divided into
two classifications: revolving credit
and instalment credit.
The most common form of
consumer credit is a credit card.
BREAKING DOWN 'Consumer
Credit'
Consumer credit is frequently
measured by economists and other
financial analysts as it serves as an
indicator of economic growth.
For example, if consumers can
easily borrow money and repay
those debts on time, then the
economy is stimulated resulting in
economic growth.
Consumer credit allows consumers to get an advance
or loan to spend money on products or services for
family, household or personal uses repaid at a specified
future date.
Retailers, department stores, banks and other financial
institutions offer consumer credit.
Advantages of Consumer
Credit
The main advantage of consumer
credit is that consumers can
purchase goods and services and
pay for them later.
Consumers can purchase items
they need when their funds are
low.
Consumer credit offers a backup
form of payment and one monthly
payment.
Disadvantages of Consumer
Credit
The main disadvantage of using
consumer credit is the cost.
If a consumer fails to repay a loan or a
credit card balance, this impacts his
credit scores, affects terms and
conditions, and results in late fees and
penalties.
Types of Consumer Credit
If you have a credit card, this is
considered consumer credit
because you use it to purchase
services and material goods
instead of investment products
such as real estate or stocks.
You have a predetermined
amount you’re allowed to spend,
and you can use it for everything
from dining out to home furnishings,
electronics or other material goods.
If you have a line of credit with a
specific store, this is also considered
consumer credit because it works
in much the same way.
Are you looking for better ways to
manage credit card spending?
Here are seven strategies to get out
of debt once and for all.
Charge Account and
Instalment Credit
Trade credit facility under which
goods are delivered or services are
provided to creditworthy
customers, who agree to pay for
them a certain period (commonly
30 days) after the date of invoice.
Each customer normally has a
'credit limit' beyond which goods or
services are provided only on cash
basis.
Tardy customers may have to pay
a certain rate of interest on the
outstanding amount as a penalty.
Also called credit account
Each customer normally has a
'credit limit' beyond which goods or
services are provided only on cash
basis.
Tardy customers may have to pay
a certain rate of interest on the
outstanding amount as a penalty.
Also called credit account
What is instalment credit?
Instalment credit is a loan for a
fixed amount of money.
The borrower agrees to make a set
number of monthly payments at a
specific dollar amount.
An instalment credit loan can
have a repayment period lasting
from months to years until the loan
is paid off.
Deeper definition
The most common types of
instalment loans are:
Mortgage loans — When you take
out a mortgage, you finance the
amount borrowed over a set
number of years, normally 15 to 30.
Once you have made all the
payments, you own the house.
Student loans — With a student
loan, you receive a specific
amount of money to cover your
educational costs.
Once you graduate from school, you pay
the lender back over a set period of time.
One less-than-usual feature of student
loans is that some loans allow you the
option to defer your payments if you are
unemployed.
Auto loans — Unless you have the money
to pay cash for a vehicle, you will likely
take out an auto loan. An auto loan is
considered “secured” because the
finance company knows that they can
repossess the car if you fail to make
payments.
Unsecured loans — If you have
excellent credit, your bank or credit
union may lend you money that
can be repaid over time.
People with less-than-stellar credit
often borrow from payday loan
companies that charge
astronomical interest rates and
tack on extra fees.
Instalment credit example
Lenders need assurance that they
will be repaid when they give you a
loan. Here are a few of the things
that they consider as they
determine the risk involved of
offering you a loan:
Your credit score and how well you
have managed debt in the past.
Your annual income and how it fits
into your debt-to-income ratio.
How long you have worked for your
current employer or been in your
current occupation.
Whether you have any additional
sources of income.
Mercantile Credit
Mercantile credit, sometimes also
called as commercial credit, which
may be described as that type of
credit which one businessmen may
extend to another when selling
goods on time for resale of
commercial use, is a characteristic
feature of our modern economy.
Parties to a transaction involving the use
of mercantile credit may be merchant
distributors like wholesalers, jobbers, and
producers or manufacturers the essential
characteristic of mercantile credit is that
it is an exchange of goods for the
purpose of sale,
whether or not the good as will undergo
further processing in the hands of the
buyer moreover as is generally practiced
mercantile credit is required only for the
length of time it takes a buyer to process
and resell the goods.
Mercantile credit may be
distinguished from consumer credit
in the sense that the former is
brought about by transactions
involving transfers of goods for
business purposes, unlike the latter
which is intended specifically for
consumption purposes.
Bank Credit
Bank credit is the aggregate
amount of credit available to a
person or business from a banking
institution.
It is the total amount of funds
financial institutions provide to an
individual or business.
A business or individual's bank
credit depends on the borrower's
ability to repay and the total
amount of credit available in the
banking institution.
BREAKING DOWN 'Bank
Credit'
Bank credit for individuals has grown
immensely over the past 50 years, as
consumers have become accustomed
to having multiple credit cards.
Some experts predicted that the 2008
financial crisis was a red flag that
meant a return to previous years, when
credit, although relatively inexpensive,
was difficult to obtain, especially for
people with poor credit histories.
Bank credit is an agreement
between banks and borrowers
where banks trust a borrower to
repay funds plus interest for either a
loan, credit card or line of credit at
a later date. It is money banks lend
or have already lent to customers.
Bank credit is the total borrowing
capacity banks provide to
borrowers. It allows borrowers to
buy goods or services.
However, it requires a fixed
minimum monthly payment for a
specified period.
For example, the most common
form of bank credit is a bank credit
card.
Borrowers start with a zero balance
and use the card to make
transactions.
The borrower pays off the balance
and borrows again until the credit
limit is reached.
Bank Credit Approval
Bank credit approval is dependent
upon a borrower’s credit rating
and income or other factors such
as assets, collateral or total existing
debt obligations.
There are several ways to ensure
approval, such as reducing the
total debt-to-income ratio. An
acceptable debt-to-income ratio is
36%; however, 28% is ideal.
Borrowers ought to keep card
balances at 20% or less of the
credit limit and pay off all late
accounts.
However, banks offer credit to
borrowers with poor credit histories
with terms that are the most
favourable to the banks but the
least favourable to borrowers.
Fees
Bank credit comes at a cost.
The cost and terms vary by bank,
credit type, the borrower’s credit
rating and the purpose of the
funds.
There are two types of bank credit
secured and unsecured.
Both have different requirements,
fees, interest rates, terms and
conditions and regulations.
Fees include the amount borrowed
plus interest and other charges.
Some fees are mandatory, such as
interest rates; some are optional,
such as credit insurance; and some
are event-driven, such as late
payment fees.
Business Credit
Many businesses need business
funding to pay start-up costs, to
pay for goods and services or
supplement cash flow.
As a result, start-ups or small
businesses use bank credit as short-
term financing.
Revolving Credit
Revolving credit is a line of credit
where the customer pays a
commitment fee to a financial
institution to borrow money, and is
then allowed to use the funds
when needed.
It usually is used for operating
purposes and the amount drawn
can fluctuate each month
depending on the customer's
current cash flow needs.
BREAKING DOWN
'Revolving Credit'
The maximum amount for a revolving
credit is fixed when the financial
institution, typically a bank, reaches an
agreement with the customer.
Along with the commitment fee, there
are interest expenses for corporate
borrowers and carry-forward charges for
consumer accounts.
Financial institutions consider
several factors about the
borrower's ability to pay before
revolving credit is issued.
For an individual, the factors
include credit score, current
income and employment stability.
For an organization or company, a
financial institution reviews the
balance statement, income
statement and statement of cash
flows.
Examples of Revolving
Credit
The credit limit is the maximum
amount of credit a financial
institution is willing to extend to a
customer seeking the funds.
The most common examples of
revolving credit include home
equity lines of credit and personal
lines of credit.
Revolving Credit vs. Instalment
Loan
Revolving credit differs from an
instalment loan, which requires a fixed
number of payments over a set period of
time.
Revolving funds require only the payment
of interest plus any applicable fees.
Investment Credit
Dictionary of Banking Terms for:
investment credit
federal tax credit resulting from
ownership of capital equipment.
The tax credit is taken in the year
the asset is placed in service.
Also called investment tax credit or
ITC. The ITC was repealed by the
Tax Reform Act of 1986 for all
equipment placed in service after
1985, unless the equipment
qualified under special transitional
rules.
The ITC was originally intended to
compensate owners of equipment
and equipment lessors for their
capital costs
Dictionary of Finance and
Investment Terms for: investment
credit
Reduction in income tax liability granted
by the federal government over the
years to firms making new investments in
certain asset categories, primarily
equipment; also called investment tax
credit.
The investment credit, designed to
stimulate the economy by
encouraging capital expenditure,
has been a feature of tax
legislation on and off, and in
varying percentage amounts, since
1962; in 1985 it was 6% or 10% of the
purchase price, depending on the
life of the asset.
As a credit, it has been deducted
from the tax bill, not from pre-tax
income, and it has been
independent of depreciation.
The tax reform act of 1986
generally repealed the investment
credit retroactively for any property
placed in service after January 1,
1986.
The 1986 Act also provided for a
35% reduction of the value of
credits carried over from previous
years, which was later changed to
50%.
Merchandise Credit
With present-day production
methods geared toward mass-
marketing of many items on the
instalment plan, radios, television
sets, refrigerators, kitchen ranges,
washing machines and hundreds of
others have become necessities to
many families even in this country
where the per capita income is
considerably low compared to that
of American standards,.
Such items purchased on the
instalment plan, as well as many
others obtained on the charge
account, are examples of
merchandise credit.
Example
When a consumer returns an item
to a store but no longer have a
receipt proving purchase was
made are often given a
Merchandise Credit in lieu of cash.
Merchandise credit is similar to a
gift card but is issued in the amount
of the returned item.
The Merchandise credit can be
used same as cash to purchase
merchandise from same issuing
retailer.
“Truth in Lending Act”
REPUBLIC ACT No. 3765
AN ACT TO REQUIRE THE
DISCLOSURE OF FINANCE CHARGES
IN CONNECTION WITH EXTENSIONS
OF CREDIT.
Section 1. This Act shall be known
as the "Truth in Lending Act."
Section 2. Declaration of Policy. It is
hereby declared to be the policy
of the State to protect its citizens
from a lack of awareness of the
true cost of credit to the user by
assuring a full disclosure of such
cost with a view of preventing the
uninformed use of credit to the
detriment of the national
economy.
Section 3. As used in this Act, the term
(1) "Board" means the Monetary Board
of the Central Bank of the Philippines.
(2) "Credit" means any loan, mortgage,
deed of trust, advance, or discount;
any conditional sales contract; any
contract to sell, or sale or contract of
sale of property or services, either for
present or future delivery, under which
part or all of the price is payable
subsequent to the making of such sale
or contract; any rental-purchase
contract;
any contract or arrangement for
the hire, bailment, or leasing of
property; any option, demand, lien,
pledge, or other claim against, or
for the delivery of, property or
money; any purchase,
other acquisition of, or any credit
upon the security of, any obligation
of claim arising out of any of the
foregoing; and any transaction or
series of transactions having a
similar purpose or effect.
(3) "Finance charge" includes interest, fees,
service charges, discounts, and such other
charges incident to the extension of credit as
the Board may be regulation prescribe.
(4) "Creditor" means any person engaged in
the business of extending credit (including any
person who as a regular business practice
make loans or sells or rents property or services
on a time, credit, or instalment basis, either as
principal or as agent) who requires as an
incident to the extension of credit, the
payment of a finance charge.
(5) "Person" means any individual,
corporation, partnership,
association, or other organized
group of persons, or the legal
successor or representative of the
foregoing, and includes the
Philippine Government or any
agency thereof, or any other
government, or of any of its
political subdivisions, or any
agency of the foregoing.
Section 4. Any creditor shall furnish to
each person to whom credit is extended,
prior to the consummation of the
transaction, a clear statement in writing
setting forth, to the extent applicable and
in accordance with rules and regulations
prescribed by the Board, the following
information:
(1) the cash price or delivered
price of the property or service to
be acquired;
(2) the amounts, if any, to be
credited as down payment and/or
trade-in;
(3) the difference between the
amounts set forth under clauses (1)
and (2);
(4) the charges, individually itemized,
which are paid or to be paid by such
person in connection with the
transaction but which are not incident
to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in
terms of pesos and centavos;
(7) the percentage that the finance
bears to the total amount to be
financed expressed as a simple annual
rate on the outstanding unpaid
balance of the obligation.
Section 5.
The Board shall prescribe such rules and
regulations as may be necessary or
proper in carrying out the provisions of
this Act.
Any rule or regulation prescribed
hereunder may contain such
classifications and differentiations as in
the judgment of the Board are
necessary or proper to effectuate the
purposes of this Act or to prevent
circumvention or evasion, or to
facilitate the enforcement of this Act, or
any rule or regulation issued
thereunder.
Section 6.
Any creditor who in connection with
any credit transaction fails to disclose to
any person any information in violation
of this Act or any regulation issued there
under shall be liable to such person in
the amount of P100 or in an amount
equal to twice the finance charged
required by such creditor in connection
with such transaction, whichever is the
greater, except that such liability shall
not exceed P2,000 on any credit
transaction.
Action to recover such penalty may be
brought by such person within one year
from the date of the occurrence of the
violation, in any court of competent
jurisdiction.
In any action under this subsection in
which any person is entitled to a
recovery, the creditor shall be liable for
reasonable attorney's fees and court
costs as determined by the court.
(b) Except as specified in subsection (a)
of this section, nothing contained in this
Act or any regulation contained in this
Act or any regulation there under shall
affect the validity or enforceability of
any contract or transactions.
(c) Any person who wilfully violates any
provision of this Act or any regulation
issued there under shall be fined by not
less than P1,000 or more than P5,000 or
imprisonment for not less than 6 months,
nor more than one year or both.
(d) No punishment or penalty provided by
this Act shall apply to the Philippine
Government or any agency or any political
subdivision thereof.
(e) A final judgment hereafter rendered in
any criminal proceeding under this Act to
the effect that a defendant has wilfully
violated this Act shall be prima facie
evidence against such defendant in an
action or proceeding brought by any other
party against such defendant under this Act
as to all matters respecting which said
judgment would be an estoppels as
between the parties thereto.
Section 7. This Act shall become
effective upon approval.
Approved: June 22, 1963
