Chapter P6, Problem 5RQ

To determine

The reasons why should credit cards and loans never are viewed as “free money”

Explanation of Solution

Credit cards and loans should never be viewed as “free money” because credits or loans are liabilities. When a person makes credit card transactions, it creates a new credit or loan for that person. And, if a person gets fails to repay that loan, then he/she needs to be repaid it with other financial assets because overspending and late fees will damage a person’s potential to pay back the loan.

Moreover, A person needs to make limited credit card transactions because every transaction will take the person to a new payment of credit with an interest rate. Interest rates will rise with each unpaid balance and it makes it difficult to control or manage the credit.

Therefore, credit cards and loans should never be viewed as “free money”.

Economics Concept Introduction

Introduction: Borrowing is the credit or loan that a person borrows from any financial institution at a particular interest rate and for a specific time period to achieve his/her targets. A credit card refers to an instrument that provides a credit facility to the user to make purchases through cashless transactions.