line of credit

Examples of line of credit in the following topics:

• Credit Operations

  • A line of credit is any credit source extended to a business or individual by a bank or other financial institution.
  • A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of commercial bills, traditional revolving credit card account, etc.
  • Lines of credit can be secured by collateral or may be unsecured.
  • A revolving credit line provides a borrower with a maximum aggregate amount of capital, available over a specified period of time.
  • Each credit line is borrowed for a set period of time, usually one, three, or six months, after which time it is technically repayable.

• Credit Cards

  • A credit card is a payment card issued to users as a system of payment.
  • The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.
  • Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.
  • The merchant is usually charged a commission of around one to three percent of the value of each transaction paid for by credit card.
  • For some terminals, merchants may need to subscribe to a separate telephone line.

• Default Risk

  • Default risk (or credit risk) of a bond refers to the risk that a bond issuer will default on any type of debt by failing to make payments which it is obligated to do.
  • To reduce the bondholders' credit risk, the lender may perform a credit check on the prospective borrower, may require the issuer to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies.
  • Under the laws of many countries (including the United States and Canada), bondholders are in line to receive the proceeds of the sale of the assets of a liquidated company ahead of some other creditors.
  • This image shows the monthly prices of sovereign credit default swaps from January 2010 till September 2011 of Greece, Portugal, Ireland, Hungary, Italy, Spain, Belgium, France, Germany, and the UK (Greece is illustrated by blue line).
  • Higher credit default swap prices mean that investors perceive a higher risk of default.

• Debits and Credits

  • Given the length of time, is it any wonder that confusion has surrounded the concept of debits and credits?
  • Debits are entered on the left side of a ledger, and credits are entered on the right side of a ledger.
  • Another way to help remember debit and credit rules, is to think of the accounting equation as a tee (T), the vertical line of the tee (T) goes between assets and liabilities.
  • What is debited and credited is also a matter of transaction type.
  • The rule of debit and credit depends on the type of account you are talking about:

• The National Credit Union Administration (NCUA)

  • On March 20, 2009, during the financial crisis of 2007–2010, the NCUA took over the two largest corporate credit unions with combined assets of $57 billion, because of the losses on their investments in mortgage-backed securities.
  • The chartering of credit unions in all states is due to the signing of the Federal Credit Union Act by President Franklin D.
  • The federal law sought to make credit available and promote thrift through a national system of nonprofit, cooperative credit unions.
  • At first, the newly created Bureau of Federal Credit Unions was housed at the Farm Credit Administration.
  • As the insurer and regulator of federally chartered credit unions, the NCUA oversees credit union safety and soundness, much like the FDIC.

• Obtaining Credit

  • Credit is a term used to denote transactions involving the transfer of money or other property on promise of repayment.
  • However, in modern societies credit is usually denominated by a unit of account.
  • Unlike money, credit itself cannot act as a unit of account.
  • Types of credit include: bank credit, consumer credit, public credit, and investment credit.
  • Describe the concept of credit and how consumers can obtain in for transaction purposes

• Credit Unions

  • Credit unions are substitutes and competitors of banks, owned by members as a financial cooperative.
  • The board of directors for a credit union is traditionally elected through a vote of all existing members, where each member gets one vote (regardless of the amount of capital one has invested).
  • There are a variety of valid reasons to support credit unions, as well as a few downsides consumers should also be aware of:
  • Credit unions are smaller, and therefore more likely to go out of business
  • Assess the value of credit unions, particularly compared to big banks and an understanding of risk

• Bonds Issued at Par Value

  • To record a bond issued at par value, credit the "bond payable" liability account for the total face value of the bonds and debit cash for the same amount.
  • It is created by recording a credit equal to the face value of all the bonds that are issued.
  • When the company makes an interest payment, it must credit, or decrease, its cash balance by the amount it paid in interest.
  • Bond Interest Expense - debit interest payment (increase interest expense line)
  • This is done by debiting the bond payable account and crediting the cash account for the full book value of the bond.

• Credit Ratings

  • A credit rating evaluates the credit worthiness of a debtor, specifically a business (company), individual, or a government.
  • A sovereign credit rating is the credit rating of a sovereign entity like a national government.
  • There are different methods of calculating credit scores.
  • Studies have shown scores to be predictive of risk in the underwriting of both credit and insurance.
  • Some studies even suggest that most consumers are the beneficiaries of lower credit costs and insurance premiums due to the use of credit scores.

• Setting a Credit Policy

  • To establish a credit policy, a company must establish credit standards, credit terms, and a collection policy.
  • Another important factor in determining credit standards involves a company evaluating the credit worthiness, or credit score, of an individual or business.
  • After establishing credit standards, the firm must decide on the length of the period that would be allowed before payment must be made and whether or not they will offer a discount for early payments.
  • If a discount is offered, the amount of the discount must also be determined.
  • Some common types of discounts include: