Problem

This case is available in MyFinanceLab.Maria will be a college sophomore next year and she...

This case is available in MyFinanceLab.

Maria will be a college sophomore next year and she is determined to have her own credit card. She will not be employed during the school year but is convinced that she can pay for credit card expenses based on her summer earnings. Maria’s parents have read a number of articles about the problems of credit cards and college students, including examples of students leaving school after a downward spiral of credit cards, overspending, working to pay bills, worrying about bills, working more hours to pay bills, and eventually withdrawing from school. When Maria showed up with a handful of applications including Visa, a Gold MasterCard, Discover, a Visa sponsored by her university, an American Express, a secured MasterCard, and a gas company card her parents were overwhelmed. Maria admitted she didn’t want them all. “I’m not stupid,” she declared. Since Maria obviously needed to learn about credit cards, her parents agreed to cosign her application on one condition. She had to approach her choice just as she would a class project and research the following questions.

Why would an unemployed college student need a credit card? What are the advantages of having a credit card? What are the disadvantages?

Step-by-Step Solution

Solution 1

A unique advantage of a credit card for an unemployed college student is the opportunity to be approved for credit when they have no credit history yet. Use of a credit card can allow the college students to get things they want, face the emergency situation and pay the bill later.

Advantages:

1. Credit cards allow the card holder to buy products or services whenever and wherever he/she wants without the need for ready cash and reimburse them at a later date.

2. Credit cards allow the card holders to track their expenses.

3. Credit cards can be used in any part of the world. There is no constraint about the time and place of its use.

4. Credit cards are the best source of emergency funds.

5. A credit card offers an opportunity to buy a desired item before the projected price increases.

To ensure a good credit history for the future, it is principally significant that college students avoid the disadvantage incorporated with credit cards.

Disadvantages:

1. Using a credit card develops a tendency for overspending.

2. Overspending builds up the larger portion of debt and interest owed.

3. A credit card is an expensive way of borrowing because of the high interest rates and other costs associated with it.

4. Using a credit card obligates future income and limits financial flexibility.

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Textbook Solutions and Answers Search
Solutions For Problems in Chapter 6DC.1