The term “Credit Management” is used in many different ways in the realm of personal finance.  Have you ever wondered when you apply for a credit card or loan, who is responsible for the decision to issue you credit?  There are many aspects that businesses use to determine creditworthiness and credit control.  You have landed on the ultimate guide to credit management, understanding the business of credit.

What will you learn in this guide?

You might have ended up on this guide for a multitude of reasons.  If your debt strategy is to understand how the credit industry works and how it can work for you, you have ended up in the right place.   In this ultimate guide, we will explore the following topics.

1. The History of Credit. The beginning to the end.
2. Understand how credit management works.  Knowledge is power! If you want to reduce your debt, you need to understand how credit works fully.
3. Learn about Credit Managers. Discover what their roles and responsibilities should be and what a career in credit management could be as a career path.
4. Resources that are available to credit managers and credit professionals.

The History of Credit

Early Days

The concept of credit started around 3500 as part of the Sumer urban civilization to manage and handle agricultural trade.   This continues into 1800 in Babylon, where the concept of interest was born to allow individuals to receive crops earlier than they can afford. This carries through to the Roman empire in 350 BC, where coins were exchanged and loaned with interest.

Moving forward to 800 AD, the concept is considered a sin due to bad economic conditions in the dark ages.    Fast-forward to 1500 AD and the need to credit to trade in faraway lands and a need for capital to create ships and merchandise to trade.    In 1545, King Henry VIII established legal trade with interest at 10%.    Moving forward to 1780’s English philosopher  Jeremy Bentham rules against high-interest rates.

Modernized Credit

In 1803-1826 credit reporting originates in England, where tailors would share information on who fails to pay their debts.  This is the earliest known record of credit reporting.  Then reports were shared in Manchester periodicals for people who failed their debts, and this was a form of public shaming and notification to others.    In 1864, in New York, The Mercantile Agency set up an alpha-numeric system for tracking creditworthiness.  This would remain in place until the 21st century.

In 1899, Retail Credit Company was founded in the United States, which would later change its name to Equifax.

The Credit Boom

In 1900-1929, was the boom of the automobile industry.  Henry Ford made the Model-T available to most people, but still expensive for the average family.   Around 1920, General Motors changes the requirements needed to get a car by loaning consumers the ability to buy a car and make payments (with interest).  The first car credit company GMAC was established to get more consumers into automobiles.

By the 1930s, automobile options were available, creating demand for cars with options creating a demand for people to buy cars every couple of years.    The concept of installment payments carried forward to other high-priced items, like appliances.    By the late 1930s, almost 2/3 of American’s bought automobiles and appliances on credit.

Credit in the Information Age

In the 1950’s the idea of revolving credit emerged, allowing the middle class more access to common daily goods with different merchants.    This was the birth of the modern credit card, opening the flood gates for consumerism to most levels of society.

In 1955, Creditors used millions of index cards to keep track of consumers across the country.   By the late 50’s BankAmericard (now Visa), MasterCard, and American Express were made available for general credit purchases.

In the early 1960s, agencies were developed and employed thousands of people to track credit authorizations or denials.    By 1964, Credit bureaus are using computer applications to track credit reporting.

The growing market for credit in America required rules and regulations by the 1970s to keep consumers safe from bad credit practices.   The FCRA (Fair Credit Reporting Act) was established to protect the rights of consumers and set standards for credit reporting.

Fast-forward to the 1980s, the three major credit unions are established (Equifax, TransUnion, and Experian which cover credit measurement across American.   By the late ’80s, the FICO algorithm was established to better picture creditworthiness by breaking the score into different factors like history, credit mix, length of history, and amounts owed.

Eventual more detailed algorithms were credit such as Vantage Scores which many major banks use to assess financial health and creditworthiness.    The internet has allowed consumers and businesses to have more availability to their credit information to better handle and control their own creditworthiness.

What the heck is Credit Management, anyway?!?

The formal definition of credit management is defining the end-to-end credit processes.  This will include the process of analyzing credit, granting credit, determining terms, negotiating terms, recovering the credit, aligning compliance, and determining rules for other credit-related functions.  The success or failure of financial institutions can be directly correlated with their credit management and control practices.  Individuals and businesses that take the time to learn how credit works can greatly benefit their peers by understanding the industry.

This can establish the process into seven key steps.

1. Analyzing Credit – Review the qualifications of the customer or business to determine creditworthiness.
2. Granting Credit – Upon approving the customers’ worthiness, one will grant the credit to allow the purchase.
3. Determining Terms – Define the length, rate, and expectations of the credit loan.
4. Negotiating Terms – Review the terms between both parties and come to a formal agreement.
5. Recovering the Credit – The process of collecting repayment from a customer over the course of the terms set.
6. Aligning Compliance – Align the credit terms with the requirements of the business and laws.
7. Determining Rules for Other Credit Related Functions – Setting rules and regulations for all of the credit steps.

The key concept behind credit management is control of credit with customers.   Credit control ensures that an organization weighs all risk factors to make sure that a customer will pay for the product or service rendered.

Credit Control

Credit control is the policy defined by companies to accelerate sales by granting lines of credit to customers.  Going to the most fundamental level, businesses will grant credit to those in good standing and possess a good track record of payments.   These organizations will limit credit to those who possess weak credit and do not have a good reputation with credit handling. The weaker scores are commonly related to delinquent payments but can be affected by other environmental factors.

Credit Control Risk Factors

There are key factors that go into the decision to offer credit to an individual or business.   The idea is to balance the risk against the reward to the company properly.   The following risk factors are evaluated when extending credit to a customer.

1. Credit Term – This is the length of time in which credit is granted.
2. Credit Payments – These are the expected payment amounts a customer should expect to pay.
3. Discounts – Businesses can incentivize customers by offering a percentage of reduction from the original sales price if the customer pays off the remaining amount before the end of the credit term.
4. Standards – The processes in which a company will handle overdue accounts.
5. Collection Policy –  Clearly define how a company will collect on late payments.

Ways Companies Handle Credit Risk

There are many ways that companies can control their risk, and the most common control factors ……..

1. Set Limitations – Determine the maximum amount of receivable that a company is willing to hold for a single customer.
2. Review the Customer’s Credit Record – Many different organizations around the world track individuals’ and businesses ‘ credit histories.  These companies can give credit lenders a good idea of the customers’ ability to pay back credit extensions.
3. Review Customer Relationship – Relationships do matter and factor into decisions of determining credit risk for customers.   Repeat customers or customers with longevity show stability and trust.
4. Insurance – Risk insurance is available to lenders to ensure that customers that default on their loans the organization can be covered.
5. Clearly Define Terms & Conditions –  It is important to have obvious factors, terms, and conditions to establish clear expectations between both parties.

The Credit Manager

The credit manager is the decision-maker for a business or organization.   Credit managers are responsible for controlling credit granted, improving revenue streams, and increasing credit sales while reducing credit risk.  The credit manager typically oversees the credit, accounts receivable, and connections departments within their organizations.  Credit Managers are considered trade professionals, that require industry-specific accreditations to serve in the role.

Responsibilities of the credit manager

The credit manager has many responsibilities which vary between different organizations and industries.   The common responsibilities of a credit manager are defined as follows:

1. Managing Credit Risk
2. Controlling bad debt expenses through defined terms on the companies accounting ledgers
3. Handling credit debt cash flows through high-efficiency collections teams.
4. Maintaining allowance for doubtful accounts
5. Managing Credit Analysts
6. Managing the Accounts Receivable department
7. Managing the collections department
8. Oversee the supply & demand of credit offerings from a company
9. Determining credit limits and terms for a business
10. The final decision maker in unique credit situations
11. Ensuring compliance with federal, state, and locality credit laws
12. Defining credit policies
13. Pursuing credit remedies for borrowers that are delinquent or do not pay their loans

The credit manager can make or break a company, business or organization.  It is paramount that the credit manager possess’s experience and expertise in credit management.

Is a career in credit management right for me?

Credit Managers are an integral part of any business that uses credit to accelerate their business.  The path to becoming a credit manager is usually for individuals who have worked within the financial management roles within an organization.   Commonly individuals will start working within a collections department for an organization while pursuing a degree in accounting or finance in college.   These individuals will commonly serve in other roles that make up credit management like business analysis, accounts receivable, and/or sales. Credit Management is a career path for an individual requiring experience, credentials, and education in the field.

Traits of a Credit Manager

Companies are looking for specific traits when they are looking to promote or hire credit managers.   These personality traits demonstrate the skills needed to be good in the role.

1. Financial Literacy – Credit Managers should be seasoned in finance and understand all financial aspects of a business.
2. Critical Thinking & Analysis – Credit Management is not as black & white as one would think.  It will be important to critically analyze the data for each customer and assess if they fall within the risk tolerance for a company.
3. Detail Oriented – Critical thinking comes from the details in all aspects of the job.   Credit managers need to be clear with the details in their policies, customer relationships, and agreements.
4. Resourcefulness – Thinking outside of the box is an important trait of a credit manager.  The goal is to generate sales for a business while managing risk.  A great credit manager can find good ways to extend credit and protecting the company at the same time.
5. Flexibility – As stated above, not everything in the world of credit is 100% black and white.  Other factors need to be assessed when making lending decisions.
6. Extrovert – Communication and relationships are super important when it comes to negotiating and collections.   Strong, positive personalities tend to perform the best in this role.
7. Clear Communication Skills –  Creating a clear understanding of expectations reduces risk and improves relationships.
8.  Results Focused – Credit Management is a financial role.  Credit Managers should be goal and results-focused to attain high performance for themselves and their company.
9. Positive Attitude – A good attitude towards people goes a long way in all aspects of this role.
10. Negotiation Skills – A credit manager should possess negotiation skills when challenged on decisions and collections processes.
11. Basic Legal Expertise – It is not critical to understanding all legal aspects of the world of credit. A credit manager must have a fundamental understanding of the legal implications for the decisions.   Pro Tip: Most credit managers have a powerful relationship with their legal department.

Considerations if you interested in Credit Management

If you are not a numbers person that can easily digest financial information, credit management may not be the right path for you.   Any management role within an organization requires an individual to make quick decisions many times a day.  The story is no different for a credit manager.  They are constantly analyzing data, making decisions that will drive the business and protect its financial interest.

A career in credit management will require a person to focus on the trade and craft of credit to succeed in the role.  It will be important to weigh all factors before deciding this is the best path for an individual’s professional career.   On the flip-side, credit managers for large organizations can make a very healthy income in this role.

Credit Management Specializations

Like most industries, there are specializations that someone can attain in the world of credit management, focusing on a particular part of the industry.

Commercial Credit Managers

Commercial Credit Management is the specialization of business to business (B2B) lending.   Commercial credit managers will focus on the many factors of a business or organization as a whole to determine creditworthiness.  Commonly they are looking at the people, process, and products to determine the business’s ability to pay back credit that is extended.    Commercial credit is typically more complex as there are more variables to analyze.

Consumer Credit Managers

Consumer Credit Management is the specialization of the business to individual lending.  Consumer Credit Managers are focused solely on doing business with consumers based on their craft to provide credit ability to individuals while managing the risk of loaning to individuals.   Consumer credit managers are commonly trained to handle high volumes of decisions and have tighter controls within their processes to assist with quicker decisions.

Construction Credit Manager

Construction Credit Managers have difficulty analyzing the state of economies (both micro & macro) and business to business credit.   The world of construction commonly has long repayment terms or specialized agreements that align with the building created.   There are special rules and regulations that construction credit managers must understand to be successful.

Resources for Credit Managers

Great books for Credit Managers

Credit Risk Analytics: Measurement Techniques, Applications, and Examples in SAS

This book is covering practical credit risk modeling.   This book is a targeted training guide designed to take credit managers to the next level with the in-house credit models for risk management.   If you are looking for a book that is a good mix of theory with practical application and step-by-step actions, this would be a good book to consider picking up.    The book is a little dry but has great practical information on credit risk.   It is a must-have for all credit managers.  More Info

The Handbook of Credit Risk Management: Originating, Assessing, and Managing Credit Exposures

This handbook is one of the quintessential credit manager’s guides for credit management.   This is a very comprehensive book on the credit management industry and its practical application for large businesses.  This book has a hefty list of references and credit market services.   This is very useful for credit managers and financial controllers.    The book is an easy read and is designed in a format that is helpful for anyone at any stage of their career. More Info

Successful Credit Control

This handbook is one of the quintessential credit manager’s guides for credit management.   This is a very comprehensive book on the credit management industry and its practical application for large businesses.  This book is a solid choice for a professional, student, or individual interested in the career path of credit management.   This book has a detailed roadmap for all required processes that go above any financial analysis.

This book has a hefty list of references and credit market services.   This is very useful for credit managers and financial controllers.    The book is an easy read and is designed in a format that is helpful for anyone at any stage of their career.

Emerging Market Bank Lending and Credit Risk Control

This handbook is one of the quintessential credit manager’s guides for credit management.   This is a very comprehensive book on the credit management industry and its practical application for large businesses.  This book is a solid choice for a professional, student, or individual interested in the career path of credit management.   This book has a detailed roadmap for all required processes that go above any financial analysis.

This book has a hefty list of references and credit market services.   This is very useful for credit managers and financial controllers.    The book is an easy read and is designed in a format that is helpful for anyone at any stage of their career.

Professional Organizations for Credit Management

Construction Credit Managers have difficulty analyzing the state of economies (both micro & macro) and business to business credit.   The world of construction commonly has long repayment terms or specialized agreements that align with the building created.   There are special rules and regulations that construction credit managers must understand to be successful.

United States
National Association of Credit Management (NACM) 

The primary association for credit managers within the United States is the National Association of Credit Management.

The National Association of Credit Management is the most widely respected professional association for credit managers.   This is a large organization of more than 15,000 professionals that focuses on advancing the business credit industry.   This organization has some of the most widely recognized certifications for people within the industry.  The certifications available for an individual to obtain are:

• Certified Credit & Risk Analyst (professional designation: CCRA)
• Certified Credit Executive (professional designation: CCE)
• Certified International Credit Professional (professional designation: CICP)
• International Certified Credit Executive (professional designation: ICCE)
• Credit Business Associate (professional designation: CBA)
• Credit Business Fellow (professional designation: CBF)

The NACM is a non-profit organization solely designed to set standards for the B2B (Business to Business) Credit Profession.   This trade organization was founded in 1896 and focuses its education, certification, and overall advancement for credit professionals.

United Kingdom
Chartered Institute of Credit Management (CICM)

The United Kingdom has a chartered institute created by the founder of the Federation of European Credit Management Associations.  The foundation was formed approximately 80 years ago and has recently been granted a royal charter in 2014.   The benefits of membership include training, workshops, resources, the award-winning Credit Management Magazine and additional guides.   Membership is highly encouraged for anyone in the United Kingdom in the business of credit management.

The foundation offers Coveted CICQM accreditation at 3 different levels.

• Collections & Credit
• Credit Advisement
• Credit Enforcement

Canada
Credit Institute of Canada (CIC)

Professionals looking for accreditation in Canada will want to become familiar with the Credit Institute of Canada.

The CIC is the professional association for credit managers who want to seek the accreditation of Certified Credit Professional (CCP).  This designation is widely recognized in the credit industry in Canada as professionals who strive for excellence in credit management.    The organization was created in 1928 solely to grant professional designations for Canadian citizens and provide a way to united the Canadian credit market.     The organization has grown dramatically in the past 90 years and now offers chapters in all major territories.

Individuals seeking the CCP accreditation need over 5 years of experience within the industry, completion of the CCP test, and abide by the organization’s bylaws.

Australia
Australian Institute of Credit Management (AICM)

Credit professionals looking for associations to get accreditation will want to become a member of the Australian Institute of Credit Management.

The AICM offers an extensive range of service offerings for Australian citizens.  The organization offers conferences, local training workshops, guest speakers, in-house training, and online courses.   The AICM offers three certificates and one credit management designation:

• Diploma of Credit Management
• Certificate III in Mercantile Agents
• Certificate IV in Credit Management
• Certified Credit Executive (professional designation: CCE)

The Australian Institute of Credit Management is the leading professional organization that focuses on business and consumer credit.  The organization does not focus on specific industries rather all aspects of the credit industry.   The AICM represents over 1300 organizations across the country.   The organization is responsible for legislation related to credit activities for the federal government. Membership offers access to all of the tools, resources, and additional benefits for members.

Europe
Federation of European Credit Management Associations (FECMA)

FECMA is the professional association for the European Union and is housed in France.  The organization was formed in 1947 by Sir Roger Clark, the founder of the United Kingdom CICM organization.    The organization is dedicated to setting credit financial standards for french business and industry.  The organization is widely accepted throughout western and eastern Europe as the gold standard in credit management practices.

Ultimate Guide Summary

We hope that you have found this article helpful in learning about credit, including the history of credit, the business of credit, what a credit manager does, and resources for credit management.   You are now empowered to understand the basic inner workings of the credit industry and how companies use credit to improve their financial position.

This guide can be helping you understand how you can improve your own financial position by understanding how credit started and how it works.  As cheesy as it might sound, knowledge is power.   You now have more information to make a better-informed decision.

You have completed the ultimate guide to credit management. If you have any comments or questions, please take a moment to leave a comment or questions.