Explain how a credit card works when a customer makes a purchase.
When you use a credit card, the card issuer pays the merchant for your purchase and adds the amount to your credit card account balance. You then repay the issuer. If you do not pay the full balance by the due date, the issuer may charge interest on the amount you owe.
Explain the difference between an interest rate and finance charge.
An interest rate is a percentage applied to the amount you borrow to determine the cost of borrowing over time. A finance charge is the actual dollar amount you are charged for borrowing, based on factors such as the rate, your balance, and how long you owe the money; it may also include certain fees.
A loan that is backed by collateral is __________.
Most loans are paid back in __________ installments.
Explain what is meant by credit. What is the function of interest?
Credit is an arrangement that allows someone to borrow money or obtain goods and services now and repay the amount later. Interest is the cost of borrowing money; it compensates the lender for letting the borrower use the money and for the risk of lending it.
Explain how credit card companies make money on their cards. What is a credit card issuer?
Credit card companies may make money by charging interest on balances that cardholders do not pay in full, by charging fees such as annual or late-payment fees, and by collecting a share of the fees merchants pay to process card transactions. A credit card issuer is the bank or financial institution that provides the card and manages the cardholder’s account.
Describe the factors that determine the amount you ultimately pay for borrowing money. How is it possible to reduce the amount you end up paying?
The total amount you pay depends on how much you borrow, the interest rate, how long you take to repay the loan, how often interest is compounded, and any fees. You can reduce the total cost by borrowing less, choosing a lower interest rate, paying more than the minimum, and repaying the balance as quickly as possible. Avoiding late payments and other fees also helps.
The ability to borrow money defines the term __________.
Compare the advantages and disadvantages of using cash instead of a credit card to obtain goods and services.
Using cash can help you avoid credit card debt, interest, and card-related fees, and it makes it easier to limit spending to the money you have. Cash is also widely accepted for small purchases. However, carrying cash can be inconvenient, and it can be lost or stolen; cash purchases may also have fewer protections if something goes wrong. Credit cards are convenient and may offer rewards or purchase protections, but unpaid balances can lead to interest and debt.
When repaying a loan with interest calculated at an annual percentage rate, the dollar amount paid in interest __________ each month.
Did you find these answers helpful?