Chapter 4.1, Problem 4R

To determine

To describe the reasons behind holding of excessive debts by the people.

Answer to Problem 4R

The dependence on credit cards for huge transactions done is one among the common reasons behind creation of huge debts with the people as they spend without thinking that it would create a heap of debt if not paid or neglected for long. Moreover, when people have the habit of paying late bills, they eventually create excessive debts not only with the principal amount but with huge interests as well.

Explanation of Solution

Advantages of purchasing goods and services on credit:

• The very major benefit in credit payments is, the more money kept in the bank and paying a little sum, would award people with the interest on savings.
• People are also provided with various benefit schemes when using the credit card for the payments.
• Management of cash flow becomes easier.

Disadvantages of purchasing goods and services on credit:

• The major disadvantage of credit payment allowance is people overspend so easily.
• High interest rates have to be paid for the delayed payments made which is an extra expenditure for the people.
• Many fraudulent activities can take place which can put the buyer in huge loss.

Economics Concept Introduction

Introduction:

Purchasing anything on credit means the buyer is getting something now for which the seller will gain at a later date. While the payment in cash is when the money is given in exchange for the goods or services purchased in cash.