List two benefits and two risks involved with buying on credit.?

Question

List two benefits and two risks involved with buying on credit.?

Answer 1

Benefits:

Because of intense competition in the credit card industry, credit card providers often offer incentives such as frequent flyer points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their programs.

Low interest rates

Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee.

Risks:

Credit card fraud



The low security of the credit card system presents countless opportunities for fraud. This opportunity has created a huge black market in stolen credit card numbers, which are generally used quickly before the cards are reported stolen.

Interest costs

Banks generally borrow the money they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If the card issuer charges 20% on money lent to users (which is common), and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 15% on the loan. This 5% difference is the "interest expense" and the 10% is the "net interest spread", and is usually a bad deal for the consumer.