Credit Policy

Posted in Finance, Accounting and Economics Terms, Total Reads: 5318

Definition: Credit Policy

A firm’s credit policy is the set of principles on the basis of which it determines who it will lend money to or gives credit (the ability to pay for goods or services at a later date).

In simple terms, the credit policy of a financial institution or business is a set of guidelines that highlight the following points–

  • the terms and conditions for supplying the goods on credit
  • customer credit worthiness
  • collecting procedure
  • precautionary steps in case of customer default

In economics, credit policy is government policy at a particular time on how easy or difficult it should be for people and businesses to borrow money and how much it will cost. This is done through change in interest rates.

Credit policy varies from firm to firm and is based on the particular business, cash flow circumstances, industry standards, current economic conditions and the degree of risk involved. It also has impact on performance, as a relaxed credit policy boosts sales but also increases defaults and bad debts whereas a conservative credit policy may restrict sales but will also minimize defaults.

Example: The use of clauses such as “3/10 net 30” is a part of credit policy. The clause states that if the customer pays the money within 10 days then he/she/it is eligible to 3% discount on the total amount else the entire amount is to be paid within 30 days.


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