FM 105 – CREDIT AND

COLLECTIONS
The Birth of Credit
One of the unique features of our
business system is that it operates to a
large extent on promises, called credit.
The word credit comes from the Latin
word credere, which means “to trust.”
The widespread use of credit is a
strong evidence
to support the belief that the people
have trust in one another.
The emergence of credit might be
helpful to point out that it is not one
design, rather a product of necessity.
Thus, as may be
logical to expect, it passed through a
long process of evolution and
development.
Nature of credit
 A credit transaction involves two
parties—creditor and debtor.
o Insofar as the debtor is concerned,
credit to him represents power—the
ability to obtain goods without in
actual tender of payment. Since the
grant of credit by the creditor to the
debtor is accompanied by a promise
on the part of the latter to pay at a
certain date, an obligation arises
which must be discharged as
promised.
o The creditor, as a seller of goods or
services on credit, has both the moral
and legal right to demand of his
debtor to pay the obligations when
due.
 Thus, credit is essentially a transfer
of goods, services, or funds giving rise
to obligations that must be discharged
in the
future.
Other Meanings of Credit
 In banking, credit is held refer to
“an entry in the books of a bank
showing its obligation to a customer,”
that is, for the
deposits made by the latter.
 In bookkeeping, credit is “an entry
showing that the person named has a
right to demand something but not
necessarily
money.”
 In commerce, credit pertains to “an
exchange transaction.”
 In another sense, credit may be held
synonymously with specific reference
to the buyer’s credit standing, that is,
the ability
to obtain goods and services, or even
money against a promise to pay for
them at a latter date.
 Likewise, the term credit may refer
to a credit instrument, that is, a
document which serves to evidence
the existence of a
business transaction anchored on trust.
The Use of Credit
The use of credit especially in the
business world is so common that, by
way of compliment, it is generally
called as “ the
life-blood of business.”
Advantages of Credit
 Credit facilitates and contributes to
the increase in wealth by making
funds available for productive
purposes.
 Credit saves time and expense by
providing a safer and more convenient
means of completing transactions.
 Credit help expands the
purchasing power of every member
of the business community—from
producer to ultimate
consumer.
 Credit enables immediate
consumption of goods thereby
providing for an increase in material
well-being.
 Credit help expand economic
opportunities through education, job
training and job creation.
 Credit spreads progress to various
sectors of the economy.
 Credit makes possible the birth of
new industries.
 Credit helps buying become more
convenient for customers.
Disadvantages of Credit
 Credit, at times, encourages
speculation. This happens when those
in charge of the savings of other
people throw caution
to the winds and thereby become
careless and unscrupulous in their
eagerness and desire to expand credit
and make huge
profits.
 Credit also tends to contribute to
extravagance and carelessness on the
part of the people who obtain them.
 Because of credit, many
entrepreneurs resort to over-
expansion.
 Credit causes one businessmen to
be dependent upon others.
The Cost of Using Credit
To use credit wisely, it is necessary to
know how much it costs. But it may
be asked: What then determines the
cost of
credit?
The price of credit, like the price of
almost any other good or service,
depends upon the cost of providing it.
When you use
NAME : JARIED O SUMBA BSBA FM 2B DATE:

1. The Emergence and Challenge of Credit Economy. Write a summary of what you have
learned on the material that was provided. List atleast five important learning that you
acquired.

The learned is emergence is that entrepreneurs need loans to open a business while banks lend
money they don't have to charge principal plus interest.

The challenges is that people default on mortgages because they can't pay back the principal plus
interest. The interest amount don't exist, they can only get it from overall money supply.

The learned five importance of credit in the economy

1.Credit is a tool for the distribution of wealth - Credit makes it possible for someone without
financial resource to  acquire goods and services necessary to earn or save to acquire  wealth.

2.Credit helps in the creation of business - credit  makes possible the organization of business
firms by providing vital  funds necessary for the start-up of any business/economic  enterprise. 

3. Credit increases purchasing power - The additional  liquidity by loan or credit to debtors,
correspondingly increases their  purchasing ability.

4. Credit is a medium of capital formation - Business  today grows and continues to grow by
relying on credit for the  accumulation of capital.

 5.Credit is an agent of production - credit makes  possible the availability of funds for
productive purposes. This is  demonstrated in the many socially oriented loans and credit
programs  of the national government and the private sector. 
redit,