Help with economics ?

Question

1. What are the implications of having either a positive or negative credit history? (Ask for specific examples.)

2. What would constitute a responsible use of credit?

3. What are three (or more) inappropriate uses of credit?

4. When selecting a credit card, what factors should one consider?

1. What are the important factors to consider when selecting a credit card?

2. Why is it important to shop for credit?

3. Do you think that high school students should have credit cards? Why or why not? Explain your answer.

Answer 1

1. Positive -- it will get you lower interest rates and you will be approved for larger loans.  It's easier to get things like cell phone lines.

Negative -- you will get rejected for loans or credit cards more frequently.  If you do get accepted, you will have to pay higher interest.  You may get rejected for things like a cell phone line, and you may even not get a job because of your bad credit history.

2. Using it to buy a big ticket item which needs a few years to pay off, for example, a house or a car.  However, this should be restricted to things that you both need and will be able to pay off.  

My dad considers credit cards to be the greatest invention ever, because they're an interest free loan.  He's right, if you're paying off your balance every month.  Responsible use of credit cards means using them where you would use cash or a check.  It's usually a bad idea to buy something that you wouldn't if you had to pay using cash or a check, and it's never a good idea to buy more than you can pay off.

3. Taking out a second mortgage to buy a vacation to Disneyworld.

Getting a new credit card and going on a shopping spree.

Taking out a car loan to buy a new car that you don't need and that's too expensive for you.

4/1. The interest rate.  If you plan to carry a balance on it, you would want a lower interest rate, but if you plan to pay it off every month, you won't really care; in fact, you might want a higher interest rate to keep you from being tempted to carry a balance.

The annual fees.  Often credit cards with lower interest rates will have higher annual fees, so it might be worth it if you plan on carrying a balance, but if you pay it off every month, you'll take the higher interest rate in exchange for no fees.

The credit limit.  Usually, people want a higher limit, because it means they can buy more stuff, but it might be a good idea to opt for a lower limit to prevent you from buying more than you can pay off.

The rewards.  Obviously, you'll want to choose one that fits your lifestyle.  People who don't fly wouldn't want one that gives frequent flier miles, and single people wouldn't want one that gets you discounts at toy stores.

2. Companies differ in what they offer.  Mainly it's interest rates and fees that vary.  It's up to you to decide which fee/interest rate combo best suits your needs.

3.  I'll say yes, provided the parents are involved and acting responsibly.  If the parents just give their kid a credit card and pay their bill every month, letting them do whatever they want, then no, because the kid never learns responsibility, and they'll have no conception of budgeting when they get out in the real world.  If, however, the parents make their kid pay off the bill every month, then yes, because it allows the kid to learn financial responsibility without having the chance to ruin their life with one mistake.  If the kid gets into trouble, the parents can still bail them out so their mistake isn't still costing them when they're 40, but they can still punish him or her in their own way, so that the kid learns their lesson.