USES, CLASIFICATIONS,

AND SOURCES OF
CREDITS
CREDIT
is derived from the Latin word
“credere” which means to “believe or to
trust.”
 Parties to a Credit Transaction
1. The Creditor
is the party that parts with present value in
exchange for the other party’s promise to pay
for the same in the future, as promised.
2. The Debtor
is the party that asks for and receive presents
value in the form of goods or services from the
creditor in exchange for the debtors promise to
pay for the same in the future.
 LEGAL CONCEPT OF CREDIT
1. From the Creditor’s viewpoint
credit is the right to claim payment of a
sum of money from another person called
the debtor.
2. From the viewpoint of the debtor
It is the obligation to pay a sum of money
in the future in exchange for value received
in the present, or in the past.
 FOUNDATIONS OF CREDIT
1. Creditors must have absolute confidence in
the personal character and in the ability as
well as the willingness of their debtors to
accept, honor, and settle their obligations.
2. Proper facilities must exist for performing
credit operations. Sources of credit
information must be available to those
granting credit if a correct and proper
evaluation of credit rating is to be made which
is the first criterion in the grant of credit.
3. The money standard must be stable. If money is
subject to frequent and wide fluctuations as to cause
it’s purchasing power to become uncertain at any time
after a contract is entered into by the contracting
parties, the holders of funds will necessarily feel
reluctant to part with their funds or goods knowing
that the purchasing power of the money that will be
paid to them may not be equal to the value of what
has been advanced whether in money, goods or
services.
4. The government must stand ready to assist the
creditor in enforcing payment of loan extended to the
debtor. Our laws recognize and protect the
enforcement of valid obligations arising from
contracts freely and lawfully entered into by the
contracting parties. While it is true that, as provided in
our constitution, no individual is to be imprisoned for
non-payment of a debt, nevertheless, our courts can
order properties of the debtors attached for their
refusal to honor and pay their indebtedness and have
them sold at public auction to cover their obligations.
 FUNCTIONS OF CREDIT
1. Credit is used as a substitute for money
2. Credit has the tendency to elevate the moral standards
of the people
3. Credit induces or persuades people to save
4. Credit enables businessman and corporations to gather
large amounts of capital to undertake large scale of
production
5. Credit allows wealth to be fully utilized
6. Credit helps in the expansion and contraction of money
supply.
CHARACTERISTICS OF CREDIT
1. Credit is a Bipartite contract
Credit always involves 2 parties; the debtor who obtains the
money, goods or services in exchange of his promise to pay at a
future date; and the creditor who lends his money, goods or
services for the right to collect on demand or a determinable
future time.
2. Credit is a Pecuniary contract
Credit is always expressed in terms of money. When you buy
goods on credit from a sari-sari store or borrow money from a
bank, it is understood that such obligation shall be paid in
money.
3. Credit is a Fiduciary contract
Since credit is always based on trust and
confidence, the debtor must always be able to merit
the trust and confidence of the creditor.
4. In credit, risk is always involved
There is always the possibility of the obligation
not being paid.
5. Credit always involves futurity
Payment on credit is always done at a future
date. In actual accounting practice, futurity means a
day or more after the credit is obtained.
 THE IMPORTANCE OF CREDIT

1. OPERATION OF BUSINESSES
• Facilitates the movement of goods and services through the
channels of trade to the consumer
• Sustains and promotes production; investigation and credit
granting
• Leads to the efficient collection of accounts receivable
• Contributes as a profit center to the attainment of a
company’s desired profit targets
• Helps in teaching debtors good habits and practices.
2. TO THE COUNTRY
• Credit as an agent of production
• Credit develops the salability of goods and services
• Credit is liquidity medium
• Credit is a medium of capital formation
• Credit complements the monetary system
• Credit is a tool for the redistribution of wealth
• Credit helps in the creation of business
• Credit motivates higher business standards and
practices
• Increasing purchasing power
• Credit makes it possible to attain growth and progress
CREDIT AND THE BUSINESS CYCLE
All credits serves as activators of the fluctuation in
the business cycle. During the recovery and prosperity
periods of the business cycle, general optimism prevails
among businessmen and consumers. This favorable
outlook results in increased in purchases. Thus, the use
of both business and consumers credit is also increased.
In the time of recession, when business activities decline,
business and consumers products are reduced. Thus, the
need for credit declines.
 CLASSIFICATION OF CREDIT
a) PERSONAL CREDIT
1) Service credit
refers to services obtained from professionals like
lawyers, doctors, dentists etc. These professionals
usually charge us for their professional fee; especially if
we are acquainted with them and are well known to
them.
2) Retail or Consumer’s credit
• Regular charge accounts- you are charged the goods
you obtain on credit and you usually pay within 15 to 20
days after you are billed.
• Revolving charge accounts- the credit is not paid in full
within this period but divided into amounts which are to be
paid in longer periods.
• Installment plan- the creditor usually requires most of the
time, a down payment. It allows the purchase of an item,
which is to be paid in equal monthly payments. Installment
credits are secured by a chattel mortgage on the
merchandise sold on credit. In the event of the default on 3
or more payments, the creditor may repossess the goods
sold on credit. Only durable goods are sold on installment
passes to the buyer only after he has made his last
installment payment.
3) Personal loan credits
differs from other forms of consumer credit in that cash or
money is given as credit instead of goods and services.
b) Commercial or Mercantile Credit
are credits that are extended by one businessman to
another businessman. Manufacturers extend mercantile
credit to a wholesaler, and wholesalers to retailers. These
transactions are called “merchandise credits” or “trade
credits” because they are in the form of goods.
c) Bank credit or Bank Loans
It has to do with the amount of funds that an individual or
a business may be able to borrow from one or more lending
institutions. In effect, bank credit is a measure of how much in
the way of cash loans may be issued, based on the credit
history and the assets of the company or person .
d) Export and Import Credit
Export credits are obtained to finance the selling
of goods outside the country. While Import credits
are also obtained to finance the buying of goods
from other countries. These are obtained from
banks. A bank credit is introduced into international
trade finance through the use of letters of credits
and drafts.
e) Investment Credit
Provide funds needed by the business to acquire costly
productive and marketing facilities. The c redit is often used
for the acquisition of fixed assets such as land, building,
heavy equipment, and machineries.
f) Agricultural Credit
• Crop loan- it is for the purpose of financing the production of
a particular crop
• Livestock loan- it is obtained to finance the raising of animals
for breeding purposes.
• Agricultural time loan- to finance the improvement of a farm
land
• Community loan- to finance the selling and distribution of
farm crops which are kept in a warehouse and evidenced by
warehouse receipts.
g) Industrial Credit
This loan is granted to industries to finance the acquisition
of equipment and machineries, to finance the construction of
a plant or factory and to some extent to finance the purchase
of raw materials for manufacturing capital goods for
consumption purposes.
h) Real Estate Credit
These are loans to finance the purchase and improvement
of real properties like a house or a building. Usually these
loans are paid off by installment over a period year.
i) Government or Public Credit
This loan is to finance the projects and programs of the
government such as computerization of government offices
for better services, building of roads, bridges, irrigation,
dams, geothermal plants, etc.
j) Secured and Unsecured Credit
Secured loans are covered by collaterals such as real
properties to guarantee the loans. When the borrower fails to
pay his loan when it falls due, the creditor has the right to
foreclose the mortgage and have such properties disposed off
to satisfy the borrowers obligation, including interest and other
charges and expenses accruing to the loan. While unsecured
loans is where the borrower merited the full trust and
confidence of the creditor.
k)Short medium and Long Term loans
Short term loans- payable within a year
Medium term loans- payable from one year to five years
Long term loans- payable beyond 5 years and usually up to 15 to
20 years.
L) Direct, Discount and Credit Lines
Direct loans- are loans whose interest payment is made
up at the time.
Discount loans- are loans where interests are deducted
at the time the loans are granted
Credit line – is an agreement between the debtor and
the creditor wherein the debtor is allowed to obtain
funds from the creditor up to a certain amount.
 SOURCES OF CREDITS
1. Retail stores
Sari-sari stores give their customers credit on an open
book account basis.
2. Grocery stores or Department stores
The customers are given the privilege of buying goods on
credit which is generally facilitated by the use of credit cards.
3. Credit unions
are cooperative organizations that lend savings of their
members to other members who are in need. This is one of
the cheapest sources of credit since borrowing members pay
a very low interest on loans.
4. Individual money lenders
are individuals who have excess funds and who usually
lend such funds to others who are in need. Generally, they
charge exorbitant interest for the use of money because of
higher risk. They are also called “loan sharks”
5. Insurance companies
such individuals can borrow from the insurance company
an amount that is allowed by the insurance company.
6. Sales finance companies
they extend credit facilities to industrial, commercial,
and agricultural enterprises either by discounting or
factoring commercial papers or accounts receivable.
7. Pawnshop
one of oldest credit institutions in the Philippines. The
amount of the loans which pawnshops may grant is subject
to the agreement of the parties. However, in no instance,
shall the amount of the loan be less than thirty percent of
the appraised value of the security offered for the loan,
unless the pawner manifests in writing the desire to borrow
a lesser amount.
BASIC COLLECTION APPROACHES

1. Education
it is always practical and good collection management
technique to indoctrinate the debtor about the credit and
collection policies and procedures of the creditor.

2. Persuasion
it is sometimes referred to as collecting by “artful intimidation”
since the effectiveness depends on the creditors knowledge of
the pertinent facts, figures, documents. It also depends on the
“coercive” collection action the creditor has chosen to
implement in case the debtor refuses to pay his debt.
3. Problem Solving Assistance
there are occasions when a debtor wants to pay his
debts but cannot do so because of problems. These
problems may directly related with the debtor’s business or
due to internal or external reasons affecting his business and
thus, his inability to pay.

4. Coercion
it must be applied only when really needed. Any form of
coercion must be valid and legal. When coercion is decided
upon, apply it promptly and to its full extent.
 CONSUMER RIGHTS AND
RESPONSIBILITIES
Lending Act
The “Truth in Lending Act” or RA 3765 is an act designed
to protect consumers against unfair billing practices of people
who extend credit to a purchaser of goods on installment
basis. Through it, citizens become aware of the real cost of
credit.
The law requires creditors to furnish each customer the
following information before the transaction is consummated:
1. The cash price of the property to be serviced or acquired
2. The down payment, if any, or the trade-in price
3. The difference between 1 and 2
4. The charges, individually itemized, which are paid or to be
paid in connection with the transaction and which are not
incidental to the extension of the credit.
5. The total amount to be financed
6. The finance charge expressed in terms of pesos
7. The percentage that the finance charge bears to the total
amount to be financed which is expressed as a simple annual
rate on the outstanding unpaid balance.