MODULE 1: PRINCIPLES AND NATURE OF CREDIT

Learning Objectives

• Know the origin and uses of credit.

• Identify the different kinds and classes of credit.
• Recognize the advantages/ disadvantages and foundation of credit.

CHAPTER 1

1. The Emergence and Challenge of the Credit Economy

a. Transition from Barter Economy to Credit Economy
• BARTER is the act of trading goods and services between two or more parties
without the use of money. Bartering benefits individuals, companies and countries
that see a mutual benefit in exchanging goods and services rather than cash, and
it enables those who are lacking hard currency to obtain goods and services.

The Need for Money

• Adam Smith, in his book entitled "Wealth of Nation", entertained the belief that
money originated in man’s rational effort to meet the necessity of finding some
medium of exchange. Thus, it was introduced into man’s economic life designed
purposely to overcome the shortcoming of barter.
• The use money for production insures and spreads benefits to every member of
economic society. Raw materials are turned into finished products which provide
not only gainful employment among the country's labor force but also contribute to
the increase in, what economists call, the multiplier effect.

The Growing Need and Demand for Money

• The decline in the spiritual power of the church and the eventual recognition of the
institution of private property have opened the gates that saw the need and
demand for money.
• For it cannot be stated too strongly that with the demise of barter as a method of
exchange in progressive countries of the world, the use of money became
important and compelling.
• Commodities as well as articles of value in which the labor of workers has made
their existence possible are offered in the exchange market for a price. That price
is Money.
• The need for exchange, which meant the concomitant use of money, was felt, and
in fact, eventually led to the sanction of exchange provided there was fair
 exchange. This brought about the birth of that dictum - "JUSTUM PRETIUM"
which in economics means the doctrine the "JUST PRICE.”
• With the fall of feudalism and the rise of mercantilism came the increasing
importance of money.
• With emphasis on foreign trade, manufacturing came to be considered important,
not to produce for home consumption as in the days of feudalism, but for exporting
abroad. Merely to export was not sufficient either. It was necessary, according to
mercantilist policy, that amount exported from a country should exceed as much
as possible the amount imported by the country so that the balance of trade would
be favorable, and the difference would come into the country in the form of money
or treasure.
• The fact however that the supply of money in many instances could not adequately
meet the increasing volume of goods entering, they exchange transaction
accounted for money being supplemented by the use of credit.

1. The Emergence and Challenge of the Credit Economy

b. Credit: Its Birth; Uses; Kinds and Classes, Advantages and Disadvantages;
Impact on Debtor and Creditor, Foundations

The Birth of Credit

• One of the unique features of our business system is that it operates to a large
extent on promises, called credit.
• Business firms sell to consumers on credit and buy from other businessmen on
credit.
• The word CREDIT comes from the Latin CREDERE which means: “TO TRUST"
The widespread use of credit is strong evidence to support the belief that the
people have trust in one another.

Nature of Credit

• Credit is a skin to a two-way street. The sale of a good or service on the basis of
deferred payment gives rise to the existence of a credit transaction involving two
parties, the creditor and debtor.
• For every debtor, is a creditor and vice versa.
Other Meanings of Credit
• In banking, credit is held to refer to "an entry in the book of bank showing its
obligation to a customer" that is, for the deposits made by latter.
• In bookkeeping, credit is "an entry showing that the person named has a right to
demand showing but not necessarily money."
• In commerce, credit pertains to "an exchange transaction" as already indicated in
a foregoing discussion.
The Use of Credit

• The use of credit, especially in the business world is so common that, by way of
compliment, its generally called as "the life-blood of business."
• Credit connects our business and financial enterprises in an invisible but mighty
chain. Unfortunately, failure in one sector of the economy generally spreads rapidly
to the other until they engulf the whole economy.
Advantages of Credit
A. Credit facilitates and contributes to the increase in wealth by making funds available
for productive purposes.
B. Credit saves time and expenses by providing a safer and more convenient means of
completing transactions.
C. Credit helps spand the purchasing power of every member of the business community
from producer to the ultimate consumer.
D. Credit enables immediate consumption of goods thereby providing for an increase in
material well-being.
E. Credit helps expand economics opportunities through education, job training and job
creation.
F. Credit spreads progress to various sectors of the economy. Credit makes possible the
birth of new industries.
G. Credit helps buying become more convenient for customers.

Disadvantages of Credit
1. Credit, at times, encourages speculation.
2. Credit also tends to contribute to extravagance and carelessness on the part of people
who obtain it.
3. Because of credit, many entrepreneurs’ resorts to over expansion. Failure to generate
the expected income can only cause a collapse which affects the nation’s economy.
4. Owing to the observation that business can be expanded or contracted rapidly through
the use of cred, businessmen are not only susceptible but eventually succumb to an
air of confidence or pessimism.
The Cost of Using Credit

• To use credit wisely, it is necessary to know how much it costs. But it may be
asked: What then determines the credit?
• The price of credit, like the price of almost any other good and services, depends
upon the cost providing it.

Interest

• Money has many uses. Anyone who extends credit cannot use the money loaned
in some other way until the debt is paid. He therefore has the right to charge for its
use. This charge is called interest.
• Interest is usually expressed as a percent (%) – for example: 12%. This is the
interest rate. An interest rate of 12% means that for every peso owned, the
borrower must pay 12 centavos. Unless stated otherwise – interest is usually
quoted as an annual charge.
• Interest is a price, and like other prices, it may vary from time to time.
Operating Expenses

• It is hardly necessary to point out the observation that business enterprises that
extend credit shoulder the same operating expenses as other businesses. They
must pay rent. They also pay for light, telephone service, water, and other things
just as they must pay their workers for their services and production.
• Collection is another item which includes sending notices when payments are due
and keeping a record of payments made.

Risk

• Extending credit always involves a risk for the lender since he can never be certain
that their debt will be paid.
• When a lender is unable to collect a debt, he takes a loss. Losses from unpaid
debts represent an added cost of doing business. Such losses are highest among
lenders who assume the greatest risk.
• Lenders who deal only with people who are known to pay their debts promptly
have few losses, if any. The more risk a lender is willing to assume, doubtlessly,
the more must charge.

Cost of Credit to the Individual

• As an observation, any cost of credit is passed on either to the individual consumer

on the basis of each sale, or to all buyers through higher prices.
How Credit Affects Prices

• Increases and decreases in credit affect prices very much in the same way as
increases and decreases in the supply of money.
• The prices of goods and their relation to the amount of money, the rapidity of use
of money, and the amount of credit may be likened to weights on the ends of a pair
of scales.
Impact of Credit upon the Creditor and Debtor

• A rise in the value of money (a fall in the prices) harms the debtors. However, it
cannot be assumed that such a circumstance will tend to benefit the creditor for
indeed it could happen that the debtor may become insolvent, and the creditor will
thus lose all or a part of his loan.
• In the same manner, a fall in the value of money (a rise in the prices) may injure
the creditor without any way helping the debtor. This is because the rate of wages
may rise more slowly than the cost of living during a period of rising prices.
Foundations of Credit
1. Creditors must have absolute confidence in the personal character and in the ability
as well as willingness of their debtors to accept, honor and settle their obligations.
2. Proper facilities must exist for performing credit operations.
3. The money standard must be stable. If money is subject to frequent and wide
fluctuations as to cost its purchasing power to became uncertain at any time after a
contract is entered into by the contracting parties, the holders of surplus funds will
necessarily feel reluctant to part with their funds or goods knowing that their
purchasing power of the money that will be payed to them may not be equal to the
value of what has been advanced weather in money, goods or services.
4. The government must stand ready to assist the creditor in enforcing payment of loan
extended to the debtor. Our laws recognize and protect the enforcement of valid
obligations arising from contracts freely and lawfully entered by the contracting parties.

SOURCE: Jean Oliveros, (2016, Feb. 18) The Emergence and Challenge of the Credit
Economy, Retrieved from: The Emergence And Challenge of the Cridet Economy by jean
oliveros (prezi.com)
THE ADVANTAGES & DISADVANTAGES OF OFFERING CREDIT

• All businesses exist in a competitive environment. Although it would be nice to

make all sales on a cash basis, it's not always possible. If your competitors are
giving their customers credit terms, you will need to offer something similar to get
their business. Selling to customers on credit has advantages and disadvantages.
A business owner must consider the effects on his company before venturing into
the potential minefield of taking credit risks with customers.
Advantages of Offering Credit

1. Meet the Competition

• When your competitors are making sales on credit to your customers, you will need
to do the same just to stay competitive.
• If you want to offer more favorable terms, you might consider giving discounts for
prompt payment. For example, instead of just providing 30-days terms, offer
2/10/30. This means that the customers can take a 2-percent discount if he pays
within 10 days instead of waiting for the full 30 days to pay.
2. Increase in Sales
• An increase in sales may or may not happen when you start selling on credit.
• If your competitors are not offering credit terms, then you will gain sales by offering
credit terms, because your customers will buy from you instead of having to pay
cash from your competitors.
3. Better Customer Loyalty
• Offering credit to customers indicates that you respect and trust them to pay their
bills before their due dates. Customers will reward these gestures of confidence
by continuing to buy from you. They will feel a degree of loyalty, and they like to
do business with someone who trusts them.

Disadvantages of Offering Credit

a. Negative Impact on Cash Flow

• When you begin selling to customers on credit, your cash flow will be immediately
affected. For example, if you begin to offer credit terms for 30 days, the cash that
you would normally receive during this time will disappear. You will not have this
cash to pay your bills, employee, and suppliers.
b. Need to Fund Accounts Receivable
• Since giving credit terms to customers will directly affect your cash flow, you must
calculate how much your accounts receivable will increase and then figure out how
you will finance this increase. You may need to use a line of credit with a bank or
ask your suppliers to extend better credit terms to your company.
c. Taking a Credit Risk with Customers
• The creditworthiness of each customer must be investigated. This will require
checking the customers' credit references and obtaining a business credit report,
such as Dun & Bradstreet.
d. Keeping up with Accounts Receivable
• Someone needs to keep up with the status of your accounts receivable. The reality
is that customers don't always pay on time, and somebody needs to make calls or
to send out past due notices. If there isn't already an employee in the office who
can do this, you may need to hire a new employee.
e. Potential for Bad Debts
• No matter how well you check a customer's credit rating and references,
eventually, there will be someone who doesn't pay. When that happens, if you turn
over the account to a collection agency, you will incur fees. If collection efforts don't
work, then you will need to write off the receivable as a bad debt.
• Offering credit to customers is a necessary evil to remain competitive in the
marketplace. If your competitors are offering credit terms, you must do the same.
Otherwise, your customers will abandon you.

SOURCE: Woodruf, Jim (2019, Jan. 25). The Advantages of Offering Credit. Retrieved
from: The Advantages & Disadvantages of Offering Credit (chron.com)

CLASSIFICATION OF CREDITS

1. According to Risk Involved

a. Secured Loans
• are guaranteed by collateral, which is an item of equal or greater value than the
amount of the loan, such as a car, home, or cash deposit.
b. Unsecured Loans
• do not require collateral and are made based on your credit score and ability to
repay.

2. According to Maturity
• Short Term – payable in a year or less.
• Medium Term (Intermediate) – less than five (5) years.
• Long Term – beyond five (5) years.
3. According to Purpose
• Agricultural Credit
• Industrial Credit
• Export Credit
• Real Estate Loan
• Auto Loan
• Commercial Credit
• Calamity Loan
• Micro financing
• Consumer Credit

Functions of Consumer Credit

• Convenient form of payment

• Buying durables in installment
• Aids in financial emergencies

Types of Consumer Credit

a. Charge Account
• A charge card is a card that provides a payment method enabling the cardholder
to make purchases which are paid for by the card issuer, to whom the cardholder
becomes indebted. The cardholder is obligated to repay the debt to the card
issuer in full by the due date, usually on a monthly basis, or be subject to late fees
and restrictions in further card use.
b. Installment Credit
• are made for a fixed amount at the time of your application and approval. This type
of loan is repaid in fixed monthly payments over a specific period of time. The
interest charges are included in the payments. Auto loans and mortgages are
examples of installment loans.
c. Revolving Credit
• A line of credit where the customer pays a commitment fee and is then allowed to
use the funds when they are needed. It is usually used for operating purposes,
fluctuating each month depending on the customer's current cash flow needs.
d. Layaway Plan
• A purchasing method that allows a consumer to put a product on hold by placing
a deposit on the item. Layaway allows the customer to make smaller payments on
the product until the purchase price is paid in full, rather than paying for the item
with credit and adding interest to the cost. A layaway plan ensures that the chosen
merchandise will be in stock and ready for pick-up when the final payment is made.

SOURCE: Felipe Gan (2014, Jan. 19) Classifications of Credit. Retrieved from:
CLASSIFICATIONS OF CREDIT by Felipe Gan (prezi.com)

666 – FROM BARTER TO BIOCHIPS | NOTES

• State the assumptions that you had about the video clearly. Explain your
own reflections on the video in a clear manner and then explain why and how you
got the feelings or impressions about the video. Analyze or judge your feelings and
thoughts about the video. Discuss the beliefs that you have formed about the
video. Limit relating your stand to the field of finance.
Hell

• The bible describes it as an everlasting fire, place of torment – where there will be
weeping, gnashing of teeth – where souls are tormented, day and night. Forever.
• Pastor Marita Harrell – shares vital information that everyone should know,
revelations that will stun us, and the terrifying screams that scientists heard as they
were drilling to what they believe are the gates of hell.
666 Mark

• Revelation 16 – “and he causes it all, both small and great, rich and poor, free and
bond – to receive a mark in their right hand, or in their foreheads, and that no man
might buy or sell, save he that he had the mark.
• If you have no 666 mark, you are not allowed to buy and sell.
 • Being a ‘cashless society’ is one way to have a control in the world of anti-christs.
• If there is no cash, and all the transactions are done through the banks, internet,
and networks of computer, it will be much easier to control and trace every person.
• There is no doubt that the rapid increase in technology (Internet, GPS, Surveillance
Cameras, Electronic Identification, Chipcards, and National ID Cards) that we see
is preparing the way for 666. And it is something that we should control, and we
should not ignore.

The Future of Money | 666 is Real

• The mark of the beast system in the future is slowly happening.

• A fisherman who did 8 hours of working yet catches only eight (8) small fishes for
the whole hours of working.
• Pastor Emerita Barqueros – Matthew 24:36, 44 “But of that day and hour, No
one knows, not even the Angels of heaven, but my Father only.”
• “Therefore, you also be ready for the Son of Man is coming, at an hour you do not
expect.”

Every 2000 years, there is a special segment on the plan of God.

• 4000 B.C. – Adam and Eve were created.

• 2000 B.C. – Birth of Abraham, The Father of Faith, and the Jewish people.
• 2000 Years Later – Birth of Jesus, The Author, and Finisher of our Faith. Our
Savior.
• Year 2000 – We celebrated the New Millenium.

Satan’s Control

• Anti-Christ or The Beast – one who will control the world and to the people who
will be left there. A world leader who is empowered by Satan.
• Genesis – first part of the bible where Satan started to control Eva and Adan.
• Revelation – last part of the bible where it shows how the Anti-Christ, or the Beast
will control the people.
• Revelation 13:16-18 – “and he causes all, both small and great, rich and poor,
free and slave – to receive a mark in their right hand, or in their foreheads, and
that no one may buy or sell, except one who has the mark – or the name of the
Beast, or the number of his name. Here is wisdom. Let him who has the
understanding, calculate the number of the beast, for it is the number of the man,
and that his number is 666.”
First Money

• BARTER is the act of trading goods and services between two or more parties
without the use of money. Bartering benefits individuals, companies and countries
that see a mutual benefit in exchanging goods and services rather than cash, and
it enables those who are lacking hard currency to obtain goods and services.

• Precious Metals, Gemstones, Gold, and Jewelries were used in 7th Century.
• First Coins also started in the 7th century.
• First Money was invented in China by a famous Chinese, Kublai Khan who
ruled the Chinese empire in the 13th Century.
• Europe did not have paper money until 1151 A.D.

First Banks
• First Banks were managed by Goldsmiths in the Middle Ages where during that
time, the fortunes of the people were in the forms of silver and gold.
• The Goldsmith will then issue a receipt (Certificate of Gold Ownership) as proof
that he has the right to keep the silver and gold. And it also became the FIRST
BANK NOTES.

Electronic Banking
• Electronic Banking started when ATM (Automated Teller Machines) and Credit
Cards were discovered.
• First ATM Machine were invented in 1939. It is used with the help of plastic cards
that we insert on the machine itself. It has a magnetic card or plastic smart card
that has a chip wherein the card number and other security information were
hidden for the people to withdraw money and confirm their identity using their pin
number or personal identification number.

Credit Cards
• It is used to buy or sell goods and services even if you do not have cash/money.
• Line of Credit is a certain amount that is given by credit card companies that an
individual can borrow and can be paid gradually.

Benefits of Using a Credit Cards

• Convenient – no need to bring a large sum of money.
• Emergency Situations – can be used as a payment in crucial times.
Cashless Society
• is one in which cash, in the form of physical banknotes and coins, is not accepted
in any financial transaction with the help of E-Commerce.
E-Commerce or Electronic Commerce
• is the buying and selling of goods and services, or the transmitting of funds or data,
over an electronic network, primarily the internet.
• Example is Amazon. Amazon is often viewed as a desirable platform for online
sellers. The popularity of Amazon, combined with the ease with which consumers
can purchase goods, may convince entrepreneurs that it's the best e-commerce
channel for their business.

1968
• Jurgen Dethloff and Helmet Grotrupp invented the CHIEF CARDS which is also
known as of today as SMART CARDS.
• Some examples of smart cards are Prepaid Phone Cards, Loyalty Cards, and Sim
Cards.
• The official student identification card of Eastern Illonois University which is called
the ‘Panther Card’ which has a tagline: “One Card Does It All” since they can use
it to buy goods, as ATM Cards, Library Card, etc., In one typical smart ID, there is
a multi-applicational chip where you can store money through certain machines
which you can use to buy on vending machines, laser printers, parking garage,
photo copiers, and other vendors around the campus.

Healthcare Smart Cards

• In France, the government did a successful healthcare smart card project wherein
they collated all the health cards that they have distributed to the people in the
health insurance system. It became successful because all the medical records of
the patients and even the medicines prescripted by the doctors were being carried
through an electronic transfer that it why it arrives much faster to the health
insurance agencies that will reimburse the money or the health benefits to the
people.
• In Germany, almost 70 million health insurance customers received a healthcare
smart card.
• Taiwan also managed to make the healthcare smart card distribution successful.

Similarities of Healthcare Smart Cards

• Decreasing cash from their systems.
• Mandatory system for all people.
• Every individual who will use ID has an equivalent number of their identity on the
database of either school or healthcare system.
Smart Identity Cards
• On September 2001, the government of Malaysia launched its first multi-purpose
smart identity card which they called MYKAD.
• The smart identity card was issued starting at the Age of 12 and above on all of
the citizens of Malaysia.
• MYKAD serves as identification card that uses chip and biometrics identification
technology. It also functions as a Driver’s License, Public Key Infrastructures, E-
Cash, and also as an ATM Card.
• Passport, Health Information, as well as Touch n’ Go Card (which is used mainly
on public toll fares system) are also features of MYKAD.
• Hongkong also launches its own version of smart identity card which they called
HK ID or Hongkong Identification Card.
• The smart identity card was required starting at the Age of 11 and above on all of
the citizens of Hongkong.
• The main purpose of the government for issuing National ID’s is to protect their
people. (Example: Using biometrics to prevent fake identity)
• Wan Mohamad Ariffin – smart card project director at Malaysia’s National
Registration Department, “A lot of governments including the US will be looking at
better identification systems to monitor the movement of people within their
countries after the terror attacks.” (Example: 9/11 Attacks on the World Trade
Center)

National ID in America

• The congress of America discusses the need to use Biometrics Technology to

create a new tamper-proof identity.
• There is a violation of the law and there will be a fine if someone hires an individual
without the tamper-proof card.
• On May 11, 2005, the US congress enacted the law concerning the tamper proof
identity card which is called the “Real ID Act” wherein the issuance of driver’s
license and ID cards should have the same requirements and will be issued by the
Federal government instead of their respective states. It was signed by President
George W. Bush.

• After the World Trade Center Attack on September 11, 2001, the American
government discovered that most of the terrorists uses fake identification cards
and driver’s license.
Bad Side of Issuing a National ID
• It will violate the privacy of the people since it will collate all the personal
information of an individual.
• Senator Libby Mitchell – against Real ID. “If we have a national database, as
described in the legislation that congress enacted, then someone will have one
key to all your data. Imagine how easy it would be to compromise that.”
• Representative Tom Allen – against Real ID. “The expense of real ID is not the
only problem with the law. I have serious concerns that place American’s privacy
and security at risk.”

It was tackled that if Americans do not have an ID before May 11, 2008, they are NOT
ALOWED to do the following:
• Not allowed to enter a federal building
• Not allowed to board a plane
• Not allowed to drive a car
• Not allowed to open a bank account
• Not allowed to get a job

Reasons why other individuals and entities are in favor of Smart ID Cards
• Reduced crimes (e.g., selling of illegal drugs, hold up incidents)
• Faster transactions
• Improve money management – In a cashless society, everything is documented.
• Increased national security – given that cash is used to finance terrorists’ activities.

NOTE: There is always a consequence for the security and convenience that we received
from the surveillance power technology – and that is our PRIVACY.

• Loss of privacy means “more control for the government.”

RFID
• Dr. Katherine Albrecht – privacy advocate, author. “Imagine a world where your
every purchase is monitored and recorded in a database, and your every belonging
is numbered. A world where someone has a record of everything you have ever
bought, owned, and every item in your closet. Imagine a system that puts a small
electronic transmitter in everything you buy, including the money or credit card you
buy it with. Imagine a world where you are constantly tracked and monitored
wherever you go. With RFID technology, all of these are possible.
 • RFID (Radio Frequency Identification) is a technology that uses radio waves
to transfer information from a TAG that has DATA going to the READER.
• The use of RFID is limitless.

October 1999
• Kevin Ashton – brand manager of P&G, together with Professor Sanjay Sarma,
founded the MIT Auto-ID Center – an organization who researches and developed
to use the RFID tags in the industry.
• Auto-ID makes a numbering scheme code, EPC (Electronic Product Code) that
provides unique serial number in any products. (Example: On a barcode only one
serial number per can goods, and this is to create a physically linked world.

Implanting Humans with Microchips

• First Implantable Microchip for Humans – it has multiple security, financial and
healthcare applications.
• VeriChip – a small device that can be compared to a grain of rice, which has
computer chip and RFID technology that can be injected to the skin. Every chip
has its own personal, financial, and medical information wherein if scanned, it will
give an ID number to a doctor or hospitals for them to log-in the identity of the
patients on their website.
• Jacobs Family – first family to get chipped by the VeriChip product.

SOURCE: Hector Gargar (2012, Aug. 25), 666 from Barter to Biochips. Full video HD:
Retrieved from: 666 - From Barter to Biochips (Full Video HD) - YouTube