RealWorldGraduation_Question_58_Credit <– PDF
Credit is a situation in which a person or institution lends money to another person or institution upon a written promise to repay the loan. The loan is usually repaid at an agreed-upon interest rate. This additional amount paid by the borrower to the lender is the fee to the lender for the use of his (or the lending institution’s) money. In other words, the lender gives his capital temporarily to the borrower; the borrower repays the amount borrowed plus a certain percentage per year at a certain rate. The additional amount repaid is income to the lender for the borrower’s use of his capital.
Normally individuals borrow from banks or credit card companies, but not every person is allowed to borrow the same amount. Some people are allowed to borrow more than others. Why do banks and credit card companies give credit unequally?
a) Most banks prefer to deal with people they know, and are more likely to be more liberal in the amount of credit they give – in other words, those who know bankers and those who work at credit card companies have an advantage.
b) People who are given less credit are victims of some bias or prejudice by the banks and credit card companies; in fact offering different credit levels is a violation of the Fair Lending Act.
c) Banks and credit card companies give credit based on what is necessary to maintain their lifestyle. Therefore, wealthy people are given more credit than the middle class people, and middle class people are given more credit than poor people because the wealthy have more day-to-day needs than the middle class, and the middle class likewise has greater need than the poor.
d) Banks and credit card companies prefer to give more credit to those who are desperate, because they can squeeze a higher interest rate out of them.
e) Some combination of the above, depending on state regulations
(The answer is on p. 2 of the PDF.)
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