Personal Finance Ch 2 Consumer Credit

Question 1

Credit card - Advantages

Answer 1

1. Safety: do not need to carry large amounts of cash
2. Repayment flexibility: payment can be made according to the person’s financial position
3. No interest charge if the amount is repaid before the payment due date

Question 2

Credit card - Disadvantage

Answer 2

1. High interest rate: If cardholders choose not to pay their credit card balances in full within the interest-free repayment period, they have to pay high interest charges.
2. Risk of credit card abuse: As cardholders do not have to settle payments immediately, they may be tempted to buy more than they should.
   These people mostly end up filing for personal bankruptcy as they are unable to repay their debts.

Question 3

Bank overdraft - Definition

Answer 3

• a kind of short-term loan
• the amount withdrawn from bank account is higher than account balance

Question 4

Bank overdraft - Advantage

Answer 4

1. Overdrafts prevent a cheque from being dishonoured due to careless mistakes by the account holder.
2. Repayment flexibility: payment can be made according to the person’s financial position
3. Overdrafts provide short-term liquidity to individuals who are temporarily short of cash.

Question 5

Bank overdraft - Disadvantage

Answer 5

1. As overdrafts give consumers flexibility in repaying their loan, they can be a trap for creating debt if used improperly.
2. High interest rate

Question 6

Lines of credit - Advantage

Answer 6

1. Convenient: consumers can borrow money anytime they like. Once the line of credit is approved, consumers do not need to apply for a new loan every time they need money.
2. Repayment flexibility: payment can be made according to the person’s financial position
3. Lower interest rate than credit card and bank overdraft

Question 7

Lines of credit - Disadvantage

Answer 7

1. As lines of credit give consumers flexibility in repaying their loan, they can be a trap for creating debt if used improperly.

Question 8

Personal loan - Advantage

Answer 8

1. Force the borrower to plan for the repayment
2. Lower interest rate

Question 9

Personal loan - Disadvantage

Answer 9

If the borrower faces an unexpected financial problem, the instalment arrangement can push him into financial trouble or even bankruptcy.

Question 10

Factors affecting personal credit record

Answer 10

1. repayment history / delinquency record: if a person had repaid loans on time, his personal credit record would be better
2. record of bankruptcy: if a person had been bankrupt at an earlier time, his personal credit record would be worse
3. credit history: if a person had applied for credit successfully in the past and his usage of credit was appropriate, his personal credit record would be better
4. financial situations: if a person’s current outstanding debt amount is low, his personal credit record would be better