What is Credit?
Credit is an arrangement by which a buyer can take possession of something now and pay for it later or over time.
Reasons for Giving Credit
- To gain a competitive edge over other sellers.
- To earn additional money through interest or repeat business.
- To sell a very expensive item that few can pay for outright.
- When sales of a product are declining, to stimulate demand.
Advantages of Customer Credit
To the economy: encourages the sale of expensive goods and stimulates large-scale production due to higher demand.
To the seller: increases turnover and profit, clears stock (reducing the risk of it going out of date), can earn interest if financing the credit, and increases customer loyalty.
To the buyer: raises the standard of living, acts as a form of forced saving, allows possession and enjoyment of goods without immediate full payment, and removes the need to carry large sums of cash.
Disadvantages of Customer Credit
To the economy: can cause a general increase in price levels.
To the seller: requires significant capital if financing the credit themselves, creates administrative expense to record instalments, and risks stock going out of date or being damaged if a buyer defaults and goods must be repossessed.
To the buyer: extra interest is paid and unproductive debt can build up, bargaining power is reduced, and it can encourage rash spending or buying undesired goods.
