Page 489 - Business Principles and Management

Unit 5

Technology tip You may also be charged fees if the number of errors your business makes on

credit sales exceeds a reasonable limit. For example, if your salespeople are care-
less and do not obtain customer information as required or process the same sale
Credit card security is becom- twice, you have created unnecessary work for the bank and credit card company
ing more important, espe- and also will upset customers when they learn of the errors. You will also pay a
cially with the growing fee if you accept expired credit cards too often or have frequent customer dis-
number of online credit card putes or a high volume of returned merchandise. Some businesses believe they
transactions. Credit cards can be lax with credit card transactions because it is not their own credit system.
now contain a security code, Such an attitude can be costly.
called a card verification
value (CVV), embedded on CREATING A PRIVATE CREDIT CARD SYSTEM
the magnetic strip to ensure
the card is not counterfeit. Some large regional and national businesses, especially retail and service businesses,
A three- or four-digit CVV is develop their own private credit card systems using the name of the business—
also imprinted on the card Sears, Target, Home Depot. They may accept only that private card. However, cus-
and is usually required to ver- tomers are increasingly expecting them to accept other major credit cards as well.
ify the account when the card Running its own credit system requires that a business establish a credit depart-
is used for online purchases. ment to perform the tasks that a bank and credit card company would do. A credit
manager, credit analysts, and clerks would have to be hired to solicit credit card
applications, check applicants’ creditworthiness, and issue cards. Then they must
manage the credit accounts, including recording credit sales, sending out monthly
statements, and collecting unpaid accounts.
The major advantage of a store credit card is the opportunity to advertise and
offer special promotions to cardholders. Customers who regularly use a private
card are usually quite loyal to that business. A major disadvantage is the cost and
inconvenience of operating a credit system. Only a very large and efficient system
would be less expensive than the fees charged by major credit card companies.
Many customers do not want to have to carry a separate credit card for each busi-
ness where they shop. Some customers sign up for a private credit card to receive
a one-time discount or as part of a promotion and then seldom use it. The large
majority of consumers prefer cards they can use in Boston, Bombay, or Beijing.

CONSUMER CREDIT PLANS

In addition to or instead of accepting credit cards, businesses may offer cus-
tomers other types of credit plans. For sizable purchases, businesses often offer
installment credit. Under this plan, customers agree to make a stated number of
payments over a fixed period of time and at a specified interest rate. Consumers
buy cars, furniture, and major home electronics and appliances using installment
credit. For example, if you bought a car on an installment plan, you would pay
a fixed monthly amount for perhaps five years until you have paid off the loan
and gain full title to the car.
Some businesses operate their own installment credit system. However, unless
they are very large and have the financial resources to make multiyear loans to
consumers, they offer the credit through a finance company. The business takes
the customer application and sends it to the finance company for approval. If the
credit is approved, the finance company pays the selling company the selling
price of the merchandise less a discount for the cost of the credit service. Then
the finance company collects the installment payments from the customer.
The most popular type of installment credit is revolving credit, which com-
bines the features of a store credit card and installment credit. With revolving
credit customers can make credit purchases at any time up to a specified dollar
limit. Under most revolving plans, customers may pay off the full amount by
the end of the billing period without a finance charge. Customers who do not
choose to pay in full have the option of making partial payments each month.

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