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.

• Commercial Paper

  • Commercial paper is a lower cost alternative to a line of credit with a bank.
  • Once a business becomes established and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit.
  • Nevertheless, many companies still maintain bank lines of credit as a backup.
  • Banks often charge fees for the amount of the line of the credit that does not have a balance.
  • Disadvantages of commercial paper include its limited eligibility; reduced credit limits with banks; and reduced reliability due to its strict oversight.

• Short-Term Loans

  • A credit card is a payment card issued to users as a method 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.
  • For smaller businesses, financing via credit card is an easy and viable option.
  • The customer then need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.
  • These loans are also sometimes referred to as "cash advances," though that term can also refer to cash provided against a credit card or other prearranged line of credit.

• 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.

• Trends in Credit After 2008

  • The availability of credit has changed in various ways in response to the financial crisis of 2008.
  • The financial crisis of 2008 has led to a number of changes in public perception of credit.
  • The events of 2008 led to a credit crunch, also known as a credit squeeze or credit crisis.
  • A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates.
  • In this case, accessing additional credit lines and "trading through" the crisis can allow the business to navigate its way through the problem and ensure its continued solvency and viability.

• 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

  • Unlike banks, credit unions return surplus income to their members in the form of dividends.
  • Credit unions serve members of modest means.
  • Federally insured credit unions are regulated by the National Credit Union Administration and backed by the full faith and credit of the United States government.
  • Shared Income: Credit unions return surplus income to their members in the form of dividends.
  • Each credit union determines the specific group or field of membership it will serve.

• 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.

• The Discount Rate

  • The Fed makes loans to depository institutions and charges different discount rates for each of discount windows.
  • The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates.
  • The discount rate for seasonal credit is an average of selected market rates.
  • Discount rates are established by each reserve bank's board of directors, subject to the review and determination of the Federal Reserve System's Board of Governors.
  • Describe the Fed's primary credit, secondary credit, and seasonal credit lending programs