CREDIT

Credit - Money Matters.

This post is about credit. The word credit is used quite often in economics. Commercial dealings in the world usually involve credit. While all dealings could not be undertaken on credit, some do. There are instances when people or businesses have no money, but want to complete their activities or projects. In such a scenario, if somebody helps them by giving money or services, then it will be in the form of a credit.

Credit helps to drive the economy and so has an important role in development. Credit increases purchasing ability of people. This helps to increase demand which in turn drives markets. It acts as a booster against economic slowdown.

Meaning of Credit.

Credit simply means lending. When a bank gives credit, it lends money. While this word could be used in different context, in commerce and economics, it means lending money, goods or services.

A credit is not a help given for free. Credit is a financial help given to an individual or business on the assurance of payment at a later date. It is a help given to somebody on the assurance of deferred payment.

Types of Credit.

Credit could be of any type. It could be classified under two categories: cash or kind. Cash may be in the form of a loan and kind could be in the form of lending goods or services.

(a) Cash: A loan is very much a credit as it is given in the form of money. Banks have the most developed credit portfolios. Besides loans, banks provide other credit facilities like credit cards.

(b) Kind: When goods or services are provided on the assurance of deferred payment, it will be considered as kind.

All credit facilities promote the growth of business and also help individuals in their pursuit of growth and development.

How Credit Helps?

Credit helps individuals and businesses in much the same way. These are some advantages of credit.

• Credit helps to solve the problem of scarcity. It helps to remove the hurdles in commerce by overcoming deficiencies.

• Credit helps in building a stronger relationship between individuals or institutions who lend and the borrowers or the end user.

• It promotes a culture of sharing responsibilities and develops trust which are pillars of a sound credit system.

• It helps in saving. When people get the support of credit, they can save money. Although, this requires a lot of financial discipline. With proper use of credit, individuals and businesses can save money.

• Credit helps to overcome stagnation. Economic activities get an impetus with credit. It helps to revive the economy.

• Credit benefits both: the giver and the receiver. Both are beneficiaries in credit because the giver receives interest on the amount he lends or ensures sales in case he gives goods or services while the receiver gets those things in credit.

Some Limitations of Credit.

Credit have some limitations too. They are:

• Credit could be misused and when this happens, it disturbs the financial equilibrium of the borrowing individual or institution.

• Credit influences expenditures. The easy availability of cash or kind, makes people more prone to spending. This could lead to shortage of cash or may affect savings.

• As lenders and borrowers are beneficiaries in credit, they could be equally prone to consequences of an ill managed credit.

• Credit could become a trap if not managed properly. When credit piles up, it becomes a dangerous proposition for the borrower. If borrower is unable to pay, it becomes equally dangerous for the lender.

Credit Management.

Some points regarding credit and its management are:

• Credit management is not a rocket science which will take years to master, but it is not easy because credit brings strain which increases as days and months pass by. Proper management of credit requires detailed information of income, expenditures, existing credit liabilities and its tenure of repayment, based on which a plan to overcome debts has to be made and implemented.

• Time has a major role in credit management. Credit usually have a duration by which they have to be settled. Some credit like loans have a specific repayment duration. The borrower has to settle the loan within this time through regular payment of EMI. A loan will never stretch beyond the date of its last EMI.

• Some credit don't have any specific time limit for settlement. Credit cards come under this category. Credit cards have no specific time limit for complete settlement of dues. The only amount which is mandatory payment for credit card is the minimum amount due. The minimum due amount has to be paid within the due date to keep credit going. Credit cards offer more flexibility for payment of dues but have a higher rate of interest.

• People who have multiple active credit should be aware of the interests they are going to pay and so, should be more careful in further dealings. Planning is required to avoid piling up credit.

Money makes you free, but credit overshadows freedom. Credit helps to drive the wheels of economy, but the wheels could also get jammed if not properly driven.

............................

The previous post was about diversifying savings.

The next post is about salary.

............................

[<<]IIIII[>>]