Credit and Problems Related

Credit

Credit is a system whereby a person who can not pay gets another person who can not pay to guarantee that he can pay. (Charles Dickens).

Accounting is a vast field, with the two main subdivisions being managerial or management accounting, and financial accounting. Many people believe that accountants have an easier time to find a job than persons in other professions. Regardless of the field one seeks employment in, it is important to draft a good CV, have it reviewed by someone else and then write a final copy. If one wanted to simplify accounting to one equation, it would be: A = E + L, where A stands for assets, E for shareholders’ equity and L for liabilities. Liabilities are money that one owes, or outstanding debt and loans. One example of a liability is a mortgage. While the real estate market has been greatly affected by the sub-prime mortgage crisis, buying houses, condominiums and other residential properties remains an attractive alternative to renting, for those who can afford it.

Having good credit may open many doors. Image: Megan Jorgensen (Elena)

So how does it work? Homes and condos can be purchased directly from the owner, but people usually go through a real estate agent. Real estate agents must usually be licensed in order to practice in most jurisdictions. Aside from following courses to obtain their license, real estate agents must also comply with the regulations of the particular association overseeing activities of real estate professionals. Similarly, a mortgage may be obtained directly from a bank or other financial institution, or through the intermediary of a mortgage broker (some believe it may result in lower interest rates). Usually, there is a down payment, a percentage of the total cost of the property, and the rest is covered by a mortgage, a loan from the bank. As a general rule, banks will only lend money to those with steady jobs, adequate income given the funds to be borrowed, and a good credit history.

Nonetheless, having good credit may result in borrowing too much. For example, someone with an excellent credit rating may be offered credit limits well beyond what they initially planned to spend, maxing out their credit cards or overdraft accounts, and ending up with large debts. Then, unpaid debt could lead to financial woes, such as bad credit and problems with collector agencies. Indeed, anecdotes abound about people who had good jobs and stable, high income, and being in good standing with credit rating agencies, were offered much higher credit limits than they had for which they were pre-approved. Then, once they accepted the credit they ended up spending much more than they initially planned or even that was customary to them. So caution is warranted dealing with credit cards, credit lines and other debt obligations or liabilities.

Organizations exist to help people manage their debts. Image: Megan Jorgensen (Elena)

Alternatively, very small commercial loans are gaining popularity in the developing world, allowing entrepreneurs to start small businesses. The practice is known as microfinance. Clearly, capital and investment are an integral part of most businesses, since a good idea and luck alone are seldom enough without financing, investing and a sustainable cash flow. Interestingly enough, a popular TV show is based on this premise. In the The Dragons’ Den potential successful entrepreneurs compete with others to gain the financial and brand recognition support from already very successful entrepreneurs, who have a proven track record and the financial resources to bring to fruition the ideas which are presented to them. The series showcases participants describing their business ideas to the entrepreneurs, who are referred to as dragons, and the ideas are then rejected or accepted, in the latter case a business plan is proposed.