Creditcan be defined as an agreement or trust that allows a party to giveresources or money to another party whereby the other party does notmake the payments immediately. In this case, a party can be a person,organization, or an institution. The party that provides the good orresources is known as a creditor or lender, while the one thatreceives them is referred to as a debtor or borrower. Credit can alsobe understood as a way of making reciprocity legally enforceable,extensible, and formal to a group of unrelated persons,organizations, or institutions. Credits encompass any forms ofdeferred payments. In most cases, when the word credit is mentioned,people think of money. However, the concept of credit also involves adirect exchange of services, as well as barter trade (Murali &Subbakrishna, 2010). The three main types of credits areclosed-end credits, open-endcredits, and a line-of-credit.
Dependingupon the needs, business or an individual may go for credits that areeither closed-end or open-end. A line-of-credit is a form of anopen-end credit. The types of credits are as described below.
Themain difference between closed-end and open-end credits is the natureof repayments. The closed-end credits include the debt facilitiesthat are obtained for a specific purpose and a predetermined period.At the expiry of the set time, the loan must be repaid in entirety,including the interests or maintenance charges. Examples ofclosed-end credits include car loans and mortgages. If the borrowerfails to repay the loan, the lending institution, for example, maydecide to seize the property for which the loan was acquired as aform of compensation (Murali & Subbakrishna, 2010).
Theseare types of credits that are not acquired for specific purposes orperiods. As opposed to closed-end credits, there are no predeterminedperiods when the borrower is to repay the loan. Instead, there is themaximum amount that one can borrow with the open-end credits. Also,there are monthly payments depending on the amount of creditprovided. The common examples of this type of credit include homeequity lines, credit card accounts, and debit cards (Murali &Subbakrishna, 2010).
Underthe line-of-credit loan agreements, the borrower is given a loan witha provision of paying for all the expenses with the use of specialbank checks. The lending institution agrees to recover the credit onany check provided on the account to a specific amount. The companiesthat are able to use their assets as a loan security frequently usethe line-of-credits. Normally, the secured line-of-credits haverelatively lower interest rates (Murali & Subbakrishna, 2010). Anexample of line-of-credit is emergency bank loans.
Thefollowing are some of the credit billing methods.
TheDouble-Cycle Billing Method
Thismethod is commonly used by the lenders, mostly the credit cardorganizations, to determine the interests charges accrued for acertain billing period. The concept of Double-Cycle Billing normallytakes into consideration the present billing cycle, as well as theaverage daily balance for the previous billing period. In some cases,this billing method can add a certain amount of interests to theborrowers whose average balances change considerably from month tomonth (Murali &Subbakrishna, 2010).
TheAverage Daily Balance Method
Thisconcept of billing is one of the most commonly used in accounting. Inthe Average Daily Balance method, the interest charges on a creditcard are determined from the amount due on the card at the close of agiven business day. In this billing concept, the total daily balancefor a given billing cycle is divided by the number of days in thatbilling cycle. To assess the borrower’s total charges, the balanceis multiplied by the rate of the monthly interests (Murali& Subbakrishna, 2010).
Murali,S. & Subbakrishna, K. (2010). Bank Credit Management.New Delhi: Himalaya Pub. House.