A credit policy is a set of guidelines that specifies credit limits and payment conditions for customers, along with a defined course of action in case of late payments.


Credit policy is an important part of the overall strategy of a firm to market its products. It refers to those decision variables that influence the amount of trade credit i.e. investment in receivables. Credit policy can be lenient or stringent. There are two types of credit policies.

Frequently Asked Questions

What is credit policy example?

For example: The company will extend credit to customers if they meet its threshold criteria for the granting of credit. The basic form of credit is a maximum credit of $10,000, with no security interest. The maximum credit can be expanded with the approval of the credit manager.

What is credit policy and its components?

In accounting, the term ‘credit policy’ comes into existence whenever an account for receiving the granted debts is established. It should be in our best interest that such receivables are either related to the credit for firms or for the consumers which is called “consumer credit” in the corporate world.

What is credit policy for customers?

A credit policy is a set of guidelines a business uses to set payment terms for its customers. A credit policy also acts as a document for internal reference. A credit policy can include guidelines such as: The payment due date. The maximum amount a customer can buy on credit, also known as the credit limit.

What are the types of credit policy?

The three main types of credit are revolving credit. It comes with an established maximum amount, and the, installment, and open credit.

What is credit policy of central bank?

Credit policy / financial policy is the use of the financial system to influence aggregate demand (AD). Monetary policy affects AD through the Central bank controlling interest rates and the money supply. Fiscal policy affects AD through the use of government spending and taxation.

What are the four elements of a credit policy?

The four elements of a firm’s credit policy are credit period, discounts, credit standards, and collection policy.

What are the three components of credit policy?

There are three components in creating a credit policy: term of sale, credit extension and collection policy. Creating the term of sale includes determining credit extension, the length of the credit term and offering a cash discount.

What is credit and collection policy?

A credit and collections policy is a document that includes “clear, written guidelines that set the terms and conditions for supplying goods on credit, customer qualification criteria, procedure for making collections, and steps to be taken in case of customer delinquency”.

Why do bankers need lending credit policy?

A current and effective loan policy is a tool to help management ensure that a bank’s lending function is operating within established risk tolerances.

How do you evaluate credit policy?

The credit policy should be determined by establishing a risk-return trade-off between the profits on incremental sales that arise owing to the credit being extended on the one hand and the cost of carrying those debtors and bad debt losses on the other.

Which is not a part of credit policy?

Credit rating is not an integral part of credit policy of a firm. Credit rating is assigned by a credit rating agency on the credit worthiness of a company.

What is 5c credit analysis?

Credit analysis is governed by the “5 Cs:” character, capacity, condition, capital and collateral. Character: Lenders need to know the borrower and guarantors are honest and have integrity.

What is optimum credit policy?

The optimal credit policy minimizes the total cost of granting credit. Firms should avoid offering credit at all cost. An increase in a firm’s average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.

What is collection policy?

A collection policy is the set of procedures a company uses to ensure payment of accounts receivables. Similar to the credit policy as a whole, the collection policy should be written and strictly followed.

Who is responsible for credit policy?

Perhaps the person with the most hands-on responsibility for credit management is the Credit Manager. The Credit Manager is responsible for spearheading the organization’s objectives around credit policy, credit terms and customer risk, and the overall management of the credit department.