How Credit Works As a Tool

Credit is mutually needed by companies and customers for a number of reasons. Companies use credit as their marketing tool to increase their profits and revenue. If a company has a high ticket item or goods that have a high value or considered as luxury goods and a customer is interested but the price is out of its reach, the company will then extend credit terms. A reasonable credit term makes the products and services much more affordable for customers.

If the company has a high ticket item and they do not have a credit policy, they will lose customers. Not only that, they will lose their market share and profit to their competitors. The company's only caution in giving a flexible credit extension to a customer is to check on its way of handling its first credit opportunity. It will determine how he is valued and perceived by other creditors. It will also determine its credit worth.

The customer's credit profile will determine the type of interest rate that will be extended to him. If his credit rating is excellent, then the customer will most likely receive the most favorable rates available. However if the customer's credit reputation is less favorable, he will be given a higher rate of interest because he poses more risk to an organization. In order to compensate that risk, the customer is charged a higher rate of interest.

Unfortunately, some consumers abuse their credit by overextending their purchases. Some companies and organizations can sometimes be blamed by extending credit to those who are not really qualified. They tend to focus more on having a lot of customers and get a big share of the market that they have neglected to implement the basic parameters of extending credits to only those who are fairly or more than qualified and grant it to those who belong to high credit risk people.

For the consumers, a ruined credit reputation will take some time to repair. It depends on the severity of the delinquency and the manner in which the consumer handled it.

Recently, some companies cut back on the amount of credit that they extend to their customers because of the recent economic downhill. There is a certainty that a percentage of these consumers or clients will be laid off and their chance of recovering is slim. These customers may not even get the chance of getting their receivables from the company they worked for.

There are 4 basic types of credit:

• Service credit – is your monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time.

• Loans – let you borrow small or large amounts of cash payable either within a few days or several years. Money can be repaid in one lump sum or in multiple regular payments until the amount you borrowed and the finance charges are paid in full.

• Installment credit – described as buying on time, funded through the store or through the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. A contract will be drawn, the customer will pay an initial payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item you purchase may be used as security for the loan.

• Credit cards – are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free loan – if you pay for the use of it in full at the end of each month.

Credit is just a tool, and tools are only as dangerous as the people who use them. To minimize the dangers to your financial health, choose your spending wisely. Think twice before taking the spending plunge.

Source by Delphine Tonel

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