Question

'credit can push the borrower into a situation from which recovery is very painful'. Explain the statement with the help of an example

Answer 1

Credit encourages spending. If a control is not kept on expenses paid through credit, it will result in a difficult situation, when it is time to pay the money, to the bank or credit card company.

A person buys an expensive watch using his credit card. Other regular expenses are met using the same credit. When the bank/credit card company’s statement is received at the end of the month, he realises that he has spent more than he can afford. The only way to overcome the situation is by an overdraft or a bank loan, both of which are available only on payment of high interest rate.