CREDIT

DEFINITION, USES, SIGNIFICANCE,

CLASSIFICATION, SOURCES
 Credit

Definition:

An ability to obtain goods and services

payable a certain sum of money on a fixed
and determinable future time.
 Uses of Money

1.) used as a substitute for money

2.) as a medium of exchange
3.) credit induces people to save
4.) credit enables businessmen and corporations to
gather large amounts of capital undertake large-
scale production
5.) credit allows wealth to be fully utilized
6.) credit helps in the expansion and contraction of
money supply
 5 /(6) C’s of Credit

1.) Character – credit reputation

2.) Capacity – ability to pay/repay
3.) Capital – total assets and properties>loans
4.) Conditions – factors affecting debtor’s ability
to pay
5.) Collateral – security for payment of debt

6.) Common Sense – person’s inner ability

 Characteristics of Credit

1.) bipartite contract - involves two parties;

debtor and creditor
2.) pecuniary contract - expressed in terms
of money
3.) fiduciary contract - trust and confidence
4.) futurity - always done at a future date
5.) risk – possibility of the obligation
not to be paid
 Significance of Credit

1.) allows the possible production of goods

2.) plays an important role in the
distribution of goods
3.) government intervention
 Classification of Credit

1.) personal credit: (a) service credit, (b) retail credit,

(c) personal loan credit
2.) commercial or mercantile credit: credits
extended by one business to another businessman
3.) bank credit/bank loans: credits granted by banks
to businessmen to finance their short-term credit
needs
4.) export and import credit: credits are obtained to
finance the buying of goods from other country
 Classification of Credit

5.) investment credit: when a business prefer to

acquire funds by entering into long-term
borrowing arrangement (most common form of
financing used by business enterprise)
6.) agricultural credits: credits given to farmers
for their lands
7.) industrial credit: loans granted to industries to
finance the acquisition of equipment and
machinery to finance construction of plant
or factory
 Classification of Credit

8.) real estate credit: loans to finance the purchase

and improvement of real properties like house
or building
9.) govt. or public credit: credits obtained from
any of the govt. institution or either
instrumentalities
10.) secured and unsecured credits
11.) short, medium, long term loans
12.) direct loans, discount loans, and credit lines
 Sources of Credit

1.) Banks: common sources of credit

2.) Retail source: one of the biggest sources of
personal credit
3.) Credit unions: cooperative organizations that
lend savings of their members to other members
who are in need
4.) Sales finance companies: biggest sources of
consumer’s credit