How to write a credit policy

how to write a credit policy

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Instructions

Start with the application process. A sample of the credit application should be included. This will help determine and explain everything that is needed. Once the application is completed, the procedure for obtaining a credit report should be explained.

Set guidelines policy and procedure. The procedure for approval should be explained. There should be some baseline process in place that helps determine if someone is approved for credit. One item to be looked is the credit score of an individual. Credit scores help determine the likelihood that someone will default on a loan. Scores can range from 300 to 850. Consumers with the highest scores are more likely to receive the most favorable terms, such as lower interest rates. How much credit is extended should be reviewed. The line of credit someone is approved for could be based on the credit score and how other credit is handled.

Determine the type of loans offered. Will the loans be secured or unsecured? A secured loan means there is some type of collateral, such as an automobile or home. If the consumer defaults on the loan, the security can be repossessed or foreclosed. An unsecured loan is one approved without any collateral pledged as security, also known as a signature loan.

Set credit terms and repayment. The method of repayment needs to be established for consumers. When will payments

be due? Is there going to be a grace period? How much will late charges be? When will past due loans be charged off as losses and sent to a collection agency? Past due receivables need to be charged off as losses when there hasn't been a payment in 180 days, but some companies will charge off their receivables after 120 days.

Decide when collections will start. Some companies will start with collection activities when an account is past due 30 days. Letters are usually mailed, and phone calls start if the account becomes 60 days past due. Decide when reports are to be generated to monitor receivables. These are called aging reports. They typically outline all of the accounts which are 30, 60, 90 and 120 days past due. The credit policy manual should outline the entire process for collections from beginning to end.

Review the results. After six months or one year, review the effectiveness of the policy manual. Sometimes this is done by reviewing the charged off accounts. If you have very few charge offs, you may want to review your credit extension guidelines. This could be a sign that you are too strict with your credit extension policy, and you could be losing sales. If the policy is too lenient, then you may have an excessive amount of charge offs, which are losses. A fine balance has to be struck.

Source: ehow.com

Category: Credit

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