Saturday, February 12, 2011

CR on unused credit limit

Following on from the previous post on these kinds of technicalities, this is my educated guess as to why there was a CR marker next to the unused portion of my credit-card limit. I'll have to look up a resource on accounting practice within retail banks, or be told by an actual bank's accountant, to find out whether I am right or wrong. That being said, I am sure enough in this guess not to be motivated to make a significant effort to find out formally. If I get the opportunity to do so that is not out of my way, sure, but not otherwise.

The appellation of CR is not accidental, nor a mere automatic repetition of such a tag in the software or whatnot. It is put there, knowingly and deliberately, for valid accounting reasons. The reason: contingent liability. The unused part of my credit limit is the amount of debt that I am authorised to cause the bank to go into. If I use that amount, I would cause the bank to then owe the merchants I've just traded with the amounts of the transactions in question. For example, if I buy $50 of petrol from Woolworths-Caltex with my credit card then I will then cause the Commonwealth Bank of Australia to owe Woolworths-Caltex that $50. That amount will then be deducted from my remaining unused credit and added into what I owe the bank.

Precisely because credit-card holders are capable of putting the card issuers in hock to others like this, it is prudent that the issuers keep a definite track of the amounts of contingent liability they are thus exposed to and in turn manage their financial and administrative practices accordingly - ie it is an example of using management accounting for its intended purpose. Thus, as liability, the unused credit amount (legal meaning of credit) is a credit-side entry (accounting meaning of credit) and so warrants the CR tag as per standard accounting practice.

Now, back to boning up on induction.


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