Accounting and Finance Foundations

Unit 10

Accounting and Finance Foundations Unit 10: Credit 752

Credit

Lesson 22.1

Chapter 22

Student Guide

Fundamentals of Credit (cont’d)

While there are several advantages of having credit, there are also some disadvantages. If credit is used

unwisely, the consequences can affect a consumer or business for years. Disadvantages include (but are

not limited to) overbuying, careless buying, and higher prices.

Overbuying: One of the most common problems involving credit is overbuying. An individual may

spend more money than s/he can actually afford when using a credit card. For instance, Ken can only

afford to purchase a $400 PC tablet. But because he has a credit card, he convinces himself that it’s

okay to spend $600 on a tablet plus purchase a $50 cover for it. After all, he knows that he doesn’t

have to pay everything off at once. As a result, he spends $200 more than he can actually afford for

the tablet, and he makes a pricey impulse purchase—$50 for the cover. Instead of asking, “Do I really

need this cover?” Ken buys it without giving it much thought because he is using a credit card.

Careless buying: Smart businesses and consumers typically comparison shop before making big and/

or expensive purchases. They conduct research, check different sellers’ prices, and figure out which

stores’ or vendors’ products are the best value before determining where to purchase the things that

they need. Unfortunately, if you rely on a credit card, you run the risk of becoming a lazy shopper and

not checking ads or other businesses’ prices before making a purchase. Instead, you’re more likely to

buy a product when it’s convenient to do so, regardless of value or price.

Higher prices: Did you know that sometimes the cost of a product is more if purchased with a credit

card versus paying with cash? Some stores and vendors offer a discount for cash purchases. The rea-

son? Most businesses are charged each time they run a credit transaction. The credit card company

charges the business, not the cardholder, when the card is swiped. To offset that charge, businesses

will pass that fee on to customers in the form of higher prices. Also, if you do not pay your credit card

bill within the grace period, you have to pay interest charges. Hence, Ken’s $600 tablet may cost much

more by the time that he pays it off.

Questions

1. Why is trust so important in a credit transaction?


2. What are the major advantages and disadvantages of credit?