Republic Central Colleges

Angeles City

HIGH SCHOOL DEPARTMENT

A Research Article Entitled The Importance of Credit in the Economy

Prepared: IV-Faith Submitted to: Mrs. Jodylyn M. Samonte Araling Panlipunan IV Teacher

IV-Faith 2012-2013 22 February 2013

Introduction

Credit, in economics and finances, refers to the faith that the creditor (lender) places in a debtor (borrower) by extending him a loan, (The word credit is derived from the Latin base meaning faith or trust). It is very useful if applied wisely. The granting of credit to an individual or a business firm given them the purchasing power that they do not have at the moment. If such credit is not properly used, the debtor may be placed in a position where repayment cannot be made. When many businesses are saddled with this problem, it may contribute to the start of a crisis situation. Also, when credit is readily available, consumers tend to avail of it even when it is not really necesarry. This will increase demand and will provide a strong pressure for increase in the price of commodities. The real objective of controlling credit is to grant it only to those who are really qualified to use it. Many firms will borrow money for expansion. Credit is also extended to purchases by sellers when a payment for good/services is deffered/postponed, with or without interest charges. Consumer credit may be granted to households through change accounts, deffered payment plans, offered by sellers, or credit cards. To obtain funds needed currently, the seller frequently discounts his accounts receivable with a bank or commercial credit firm. It performs two primary function: (1) it facilitates the transfer of capital money, thereby increasing the productivity of capital by placing it where it will be most effectively and efficiently used; and (2) it economizes on the use of money. Many citizens whether they are rich or poor take advantage of the credit system in the following situations: 1. Deferred payment in the purchase of goods and services 2. Borrowing and lending money 3. Issurance of fiduciary money or representative paper money

Methods

This research is an example of a library research. This research explains what credit does to our economy and why is it use. It also shows here what are the instruments, bases, kinds, importance and uses of it. Credit can be helpful to those people who are in need of money from their own neccessities if it use properly and given to a person that is trustworthy and have the ability to pay back the money that they borrowed in a specific date. So that the lender can avoid any complication. We came up with this research with the help of the references that are available in the library and the ideas that we compiled to complete this research. Some ideas came from the books that we used and some are from the opinions of the researchers who made this.

Discussion Instruments of Credit Credit instruments are written evidences of a credit transaction, involving debtorcreditor relationships. They are promises, to pay money and include the open-book account, the promissory note, the draft or bill of exchange, and bonds and other evidences of debt sold by corporations and governmental units in the money market. 1. Check Check is a draft or order upon a bank for the payment of certain sum of money to a specific person named therein in his order or bearer payable on the date indicated. 2. Credit Book Credit Book is widely used by sarisari store-owners or ordinary private lenders like the small lending institutions and people engaged in lending. The amount of loan and the payments are listed in an ordinary notebook. 3. Promissory Note Promissory Note is a credit instrument which guarantees the existence of debt contracted by the borrower from the creditor. The note constitutes a binding contract, where the borrower promises to pay a specified principal sum with interest rate, and payable at a certain date. 4. Bills of Exchange or Draft A signed written order addressed by one person (the drawer) to another (the drawee) directing the letter to pay a specified sum of money to the order of a third person (the payee). The drawee is another party who is directed to the pay sum specified in a check, draft, or bill of exchange, while the drawer is any party who draws a draft of check upon another party for the payment of funds. Payee is a person or a firm to whom a promissory note or check is payable. If it is used in local transaction, it is called domestic draft or bill; if it is issued in foreign trade transaction, it is called foreign draft. 5. Commercial Letter of Credit Commercial letter of credit is a document issued by a bank, which guarantees that the bank will accept drafts drawn under it by the exporter to a certain maximum amount and under stipulated conditions. Exporters and importers usually use it.

Bases of Credit The willingness of creditors to sell goods or lend money against later payment is based upon the so called four Cs of credit-character, capacity, capital, and collateral. Not everyone is entitled to the use of credit. There is a need in determining who are qualified, so here are some bases to be taken into considerations. A credit agency collects information on individual on the character, income level, outstanding debts, and capital of credit applicants. 1. Character The character is the sum total of personality traits which would distinguish an individual from another. He must be dependable, honest, trustworthy, and have a word of honor to be qualified. 2. Capacity Capacity is the ability to pay regardless of the willingness of the borrower to discharge his credit. If he has no satisfactory means of settling the debt, he shall remain a poor credit risk. 3. Capital Capital is related to capacity. The ability of debtor or borrower to pay depends on the amount of money, income, or property he has to enable him to pay his obligation. In some cases, the creditors like banks require the debtor to put a collateral to guarantee the loan obligation. It also requires the mode of payment with corresponding interest. 4. Collateral Collateral is the security with which the debtor, at the request of the creditor, buttresses his obligation. It consists of such assets as consumer durable goods (automobiles, houses,stocks and bonds, farm land, office buildings, bills of landing, warehouse receipts, and so on. Kinds of Credit 1. Consumer Credit Consumer credit may be defines as a kind of credit extended to consumers in order to materialize the consumption that will help them meet their needs.

2.

Agricultural Credit Agricultural credit is a type of credit used for the specific purposeof meeting the needs of agriculture such as the buying of fertilizers, tractors, seedlings, pesticides and other farm inputs.

3.

Mercantile Credit Mercantile credit is also called commercial credit and may be described as the type of credit wherein one businnesman extends credit to other in the sale of goods. It may be distinguished from consumer credit in the sense that the former is brought about by transaction involving transfer of goods for business purpose unlike the consumer whose credit is intended specificaly for consumption purposes.

4. Industrial Credit Industrial credit is the one used in the establishment and operations of industries. It may be used to finance the needs of industries like buying of machineries and other needs in manufacturing. Importance of Credit Credit which defined as the ability to obtain a thing of value in exchange for a promise to pay with money or something equally satisfactory to the shelter at some future time. It represents both as power and obligation on the part of the debtor. On the other hand, to the creditor, credit signifies the existence of a legal and moral right as well as an expectation of the fulfillment of a promise. As a power, credit enables the individual to stretch his purchasing ability. It can obtain goods and services which otherwise the individual lack of or if not total absence of cash at that particular time. Evidently, credit in this sense expresses the ability of the debtor to purchase on the basis of the sellers or lenders belief that payment should be made and promised in accordance with their agreement. As an obligation on the part of the debtor, credit represents a legal and moral responsibility to honor his promise or commitment which has arisen out of a past transaction. As such, credit may be said as quantitative and, therefore, capable of some definite measurement, that is, the credit of an individual or firm must necessarily be equal, if not more than, the total amount of the indetedness incurred.

Credit is the use of trust, without it the corresponding transaction will not exist. Its cheaper and more effective means of carrying on a business than the exclusive use of ones own funds. However, if the creditor abuse the use of credit, it can lead to the rise of obligations. Uses of Credit 1. Shelter When it comes to where you live, having good credit is important. Mortgage lenders want to know that you wont default on your mortgage. If you dont have good credit, the lender will consider it risky to give you a mortgage loan. This could result in a higher cost of borrowing or worse, a denial of the loan. Dont think that because youre not on the market for a new home, that your credit wont be called into question. Your credit is used for rental decisions, too. Landlords consider your lease as a loan. Youre being loaned a place to live and the landlord wants to know youll pay back this loan. If you don't have good credit, you can get denied for an apartment. 2. Transportation Unless you have the cash to purchase a ca r, youll have to get a loan. Your credit not only affects whether or not you qualify for a loan, but also the amount and interest rate of the loan. Generally, loan applicants with good credit qualify for larger loan amounts with lower interest rates. 3. Employment Many employers conduct credit checks as a part of the hiring process. If you havent demonstrated financial responsibility, a prospective employer might be hesitant to hire you. For example, the employer might believe your level of debt is too high for the salary offered. 4. Entrepreneurship Many people have dreams of starting their own business. Most business startups require a sizable amount of cash that you might not have available. In that case, youll need to obtain a small business loan. Amo ng other things, you need to have good credit to qualify for the business loan. 5. Utility Services It might be somewhat shocking to learn that your credit is needed to establish utility service. Your electric company contends that youre borrowing one month of electric service. So, before turning on your electricity, the company

will check to see if you have good credit. This applies to most utility services including cable, telephone, water, and even cell phone. Since your credit is defined by how youve paid (or not paid) your bills in the past, many businesses landlords, mortgage lenders, utility providers, and even employers use your credit to predict your future financial responsibility. Anytime you need to borrow money, or even services, your credit is called into question. This is why maintaining good credit is so important.

Conclusion Credit, therefore is the transfer of property on promise of future payment. It comes in multiple instruments, uses, kinds, and bases. Some people avail things, properties, and neccesities that they cant afford or pay for now, but probably , can if given some time. Some find it inconvinient and uncomfortable to carry large sums of cash outside their respective homes or everytime they decide to buy some things in emergency purposes. And nowadays is a form of business for others. Without it, the global economic system would grind to stop.

References: Principles of Economics; Roberto G. Medina Encyclopedia Americana Grolier Encyclopedia of Knowledge New Age Encyclopedia; Colbourne & Dice Turning points IV; Imperial, Dallo, Samson, Soriano & Anotonio Frontiers;Cristobal M. Pagoso & Lorna B. Buenavista