Why is Credit Needed?

Credit is needed for a number of reasons. If a company is selling large ticket items and the price is out of reach for the average customer then they will extend credit terms. Reasonable credit terms make products and services much more affordable for customers. If a customer purchases a $10,000 item there is a good chance that they may not have the cash available. Therefore credit is needed. Some companies have their own credit departments which allow customers to apply immediately to see if they are approved for credit. If a company has no credit department then the customer has to secure financing from an outside source.

The customer's credit report will determine the type of interest rate he receives. If his credit is in excellent shape then chances are the customer will receive the most favorable rates available. On the other hand if the customer's credit is in less than stellar condition he will receive a higher rate of interest because he poses more of a risk to an organization. In order to offset that risk the customer is charged a higher rate of interest. This is the same philosophy mortgage companies and car dealerships use when they are extending credit.

Companies use credit as a means of increasing their profits and revenue. If they have high ticket items and no credit policy then they will lose customers, profits and market share to their competitors. They must be flexible with the extension of credit. Once a customer has a credit record with one company it paves the way for him to receive or not receive credit with another organization. How he handles his first credit opportunity will determine how he is perceived by other creditors. This is how they determine if someone is credit worthy or not.

Unfortunately some consumers abuse credit by overextending themselves. Companies and organizations also contribute to the problem by extending credit to those who should not qualify. If you ruin your credit it can take some time to repair, depending on the severity of the delinquency.

Recently we have seen companies cut back on the amount of credit they are extending customers because they are uncertain what' s going to happen with the economy. If they extend credit to too many people they know that a certain percentage will get laid off and they will not have any chance of recovering their receivables. Even customers that already have credit are seeing their lines of credit reduced or closed all together, in an effort by the creditor to curtail losses.