Consumer Credit

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The credit period extended by business firms usually ranges from 15 days to 45 days. When goods are sold on credit, finished goods get converted (from the point of view of the selling firm) into receivables (book debts). Receivables, when realized, generate cash. The balance in the receivables account roughly is: average daily credit sales multiplied by average collection period.

A pivotal question in the credit policy of a firm is what standard should be applied in accepting or rejecting an account for credit granting? A firm has a wide range of choice in this respect. At one end of the spectrum, it may decide not to extend credit to any consumer, however strong his credit rating may be. Get Your Equifax Credit Report Now!

At the other end, it may decide to grant credit to all consumers irrespective of their credit rating. Between these two extreme positions lie several possibilities, often the more practical ones.

In general, liberal credit standards tend to push sales up by attracting more consumers. This is, however, accompanied by a higher incidence of bad debt loss, a larger investment in receivables and a higher cost of collection. See: Credit Cards