Video Transcript: Credit Management

Welcome. We're going to discuss credit management. What is credit? Credit is  when good services or money is received in exchange for a promise to pay a  definite sum of money at a future date. So why would a person want to use  credit anyway? Well, first we need to . We need to discuss how is credit  obtained, right? Borrower is in need of credit. They need capital. They need  cash. A borrower is a person or organization that is receiving the money, right?  So why would a lender assess a borrower's credit worthiness before granting  credit? Right? Why would they do that? What would be the responsibility of  doing so? Why would they want to understand persons history, as far as  repayment is concerned? So the borrower request requests a to receive credit  from a lender. Right? The lender is a person or organization who has the  resources to provide the borrower money, such a financial institution,  commercial bank lenders determine whether to grant a borrower credit based on perceived credit worthiness. There's a whole lot of factors that go into perceived  credit worthiness, right credit worthiness and individuals ability and willingness  to pay back the money, there are a whole host of characteristics that entail credit worthiness, paying back credit if approved, the borrower, borrower will receive  money from the lender, that is if they are approved. Now, why would a lender  charge a borrower interest? Right? Well, a borrower is usually expected to pay  interest in addition to the money borrowed. Right? That is for the bank or the  financial institution or the lending company or the lending party, that is their  return for the risk of letting somebody borrow the capital the borrower pays  money back and form of interest payments. So closed end versus open end  credit. So let's, let's look at the characteristics of closed end credit, right? It's a  one time loan specified in the application, right? What is it for? Well, we're  specifying in the application one time loan. I need this so that I can pay this  back. Usually its payments are specified number of equal payments. The loan  amount is agreed upon during the application process. And the mortgage, you  know, this is where you'll get the examples of a closed end credit mortgage, car  car loans or student loans are examples of closed end credit. So now let's  discuss open end or what is known as revolving credit, right? Kind of like a  credit card or line of credit, right? It's credit extended in advance may be used  for a variety of purposes, right? You need quick cash infusions into your  business, and you're able to get a million dollar line of credit that is revolving. So when I paid, let's say I maxed out the million dollars. I pay half of it back. Now I  have another 500,000 that I can put back in the business if I need to, or I can  hold it back and have ammo for when I need it, if I need to infuse my company  again with capital. So a lot of times, banks will offer line of credit, open end  credit varies. Can be paid in one payment or a series of equal or unequal  payments, right? So just when I pay it back, it's like having a credit card, but a  big credit card, the loan amount can be increased, right? So I can get an  extension on my line of credit, I can have a million dollar line of credit, and if I'm 

doing well with that million dollar line of credit, the bank may say, Well, hey,  we're going to give you a $2 million line of credit, because you're doing so well  with the $1 million line of credit, right? So a million dollar line of credit can be  taken out on a credit card given to you by the bank or the financial institution.  What type of lending do financial institutions provide? Right? So the close ended credit, we kind of spoke about this a second ago, but a 15 to 30 year mortgage  is a typical type of close ended credit. A home equity loan, you come back and  you take some of the value out of your home for whatever personal needs you  may have. And then a car loan, 3, 5, 6, years standard time horizons on a car  loan, and then student loans. Right? Service credit, sell cable, internet, utilities,  right? So we can get service credit, so if we've taken advantage of a discount or  a rebate or something like that, that could be a type of credit that we received  back, open ended credit, line of credit, a pre established amount that can be  borrowed on demand with no collateral from the Bank, you get a line of credit,  credit card, bank, credit card, Visa, message card, discover right. You no  collateral necessary. Your credit worthiness deems your size of line of credit and interest rate, and you go from there. So it's an open line of credit. If I max out  that line of credit, and then I pay half of it back. Now I still have half of the line of  credit to use. It's different than a closed ended loan, where as I pay down my  mortgage, I'm just paying back the bank and now I don't have access to that  money that I paid back, because I'm just paying back the loan, where an open  line of credit is a revolving door. What is a credit card, a pre approved credit  which can be used for the purchase of goods and services now and payment for them later, may continue to borrow as long as, as long as the credit limit or the  maximum dollar amount loan is not exceeded. Credit limit varies based upon the cardholders perceived credit worthiness, advantages and disadvantages to  using credit. So number one advantages, let's check those out. Convenient  payment tool, right? So if I have a million dollar line of credit and I need  $250,000 right now, I just put it on the credit card, right? Useful for emergencies. Emergency cash, something arises that we're not anticipating, right? And we've  got a lot of cash locked up, and we can't we it's not very liquid, because it's in  raw materials. And, you know, we have a big machine breakdown, and we don't  have enough cash to fix it, so now I've got a line of credit from the bank, and  now we can get the machine fixed so we can continue operation. Often required  to hold a reservation, right? So, so if I want to go out of town, and you know,  we're going to get a hotel, and we need to put the credit card down for a  reservation, able to purchase big ticket items and spread out payments. So  instead of having I want to buy something that cost 10 grand, and I don't want to just check out 10 grand, I can put it on my credit card and pay it back over time.  Protection against fraud, opportunity to establish a positive credit history, online  shopping is safer than using a debit card, possibility of receiving bonuses and  cash back from credit card usages. Disadvantages. Interest can be costly when 

a balance is revolved, right? So it's just going to be compounded interest over  time, right? So if you take three years to pay back the line of credit, you've just  compounded all the interest for three years. So you're going to pay a lot more  for whatever you bought. Additional penalty fees may apply, right? So let's say  

we go over our line of credit, right? They may charge us a penalty. Or if we take  out cash from our line of credit, they may charge us a penalty attempting to  overspend. Right? We've got a credit card, we know we can pay it back and  payments, you can just swipe it right. Risk of identity theft, responsible for losses on cards, applying for multiple accounts in a short period of time, can lower your credit score. You don't want to have a whole lot of credit out.