To explain: The meaning of credit and debt.
Explanation of Solution
Credit: Credit refers to the funds received either directly or indirectly (through credit card) to make present purchases with a promise to pay them in the future.
Debt: It refers to the obligation of a person (borrower) to pay the lender in the future. When a person takes credit, he generates the debt.
A person takes credit to purchase the things that are highly costly and cannot be purchased by making a single payment. For instance, people buy vehicles, houses, etc. on credit, and pay the lender in the future. As a result of purchasing on credit, debt is generated. The original amount borrowed is called the principal and the extra amount paid to use someone else’s funds is called interest.
There are many sources of credit such as credit card, charge account, and banks, etc. credit card and charge accounts do not pay cash directly to borrowers. A charge account allows a person to make purchases without paying cash from a particular company in present and pay in the future. Whereas credit card is a device that allows people to make purchases at many kinds of stores, restaurants, and other places without paying in cash.
Finance charge and annual percentage rate (APR) refers to the cost of credit. Finance charge refers to the cost of credit in dollar terms. It includes both interest payment and any other charge such as annual fee etc. The annual percentage rate refers to the cost of credit in yearly percentage terms. APR allows a person to directly compare the cost by just seeing the percentage. The source of credit which has a lower APR is used to take credit.
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