Question

1. (a)   Into what broad categories is consumer borrowing normally divided? Which category is most important and Why?

                      (b)   What is the difference between CREDIT CARDS and DEBIT CARDS?

                      (c)   What advantage does a credit card grant its owner? A debit card? What are the principal disadvantages of each?

                     (d)   Which sector of the economy usually provides the greatest amount of loanable funds for borrowers to draw upon? Does this sector make primarily direct loans or indirect loans to borrowers?   

Answer 1

Answer(a): Categories of consumer borrowing- Are as following:

Non-installment credit- This is a simple credit and is provided usually for 30 days, the buyer makes payment on or before the expiration of credit period. Mostly retailer give this kind of credit to its daily customers whom the shopkeeper knows.

Installment closed ended credit- In this type of credit, special amount of money is lent to the consumer. This credit is given by the departmental stores or showrooms on the large items, store keeper provides EMI service and charges interest also.

Revolving open ended credit- Credit card is the best example of this kind of credit. In this credit, lender extends credit to the consumer that is based on his past credit and payment history. credit card has credit limit of $1000, $2000, $5000 etc.

Answer(b): Credit card and debit card both are the examples of plastic money, both serve the mode of payment but the fundamental differences are:

1. When you pay through Debit card, it deducts money from your bank account from which that debit card is associated with while in case of credit card, it charges from your line of credit and does not deduct any amount from your bank account.
2. There is no interest charged when you pay through debit card because it is your own money while when you pay through credit card, you are charged interest and that is huge.

Answer(c): Advantage of credit card- It gives the limit to purchase and to make payment without deducting amount from your bank account. It provides ease in purchasing and making payment.

Disadvantage- Higher interest is charged on credit card limit and people have to repay the amount at once.

Advantage of debit card- It is simple to use and no interest is charged, it makes your purchase easier.

Disadvantage- No grace period is given like credit card. There is debit card fraud also, your card may be stolen or lost.