CREDIT AGREEMENT

Credit Agreement Questions



Credit Agreement Questions

Question Scenario A

Sam and his girlfriend are shopping in town. Sam wants to buy some nice clothes for his girlfriend. They enter the shop Zara, at the counter Sam finds out his bill is 370 pounds sterling.

He has a Current Account credit limit with his bank for 150 pounds sterling. His options:

1. Use the card anyway and pay the overdraft?

- If he takes option 1, is the overdraft authorized-?

- Consider these points: Would the Interest rate Sam pays be at an ordinary rate or a higher rate? Explain your answer.

If, Sam takes this first option, the overdraft will be authorized. Generally, the limit for the credit card is 150 pounds sterling, while his total bill is 370 pounds sterling, therefore Sam will need to get the overdraft. However, the interest rate that Sam will have to pay will not be ordinary but higher than the normal rate.

2. Sam requests that the shop hold the clothes for him and he rings his Bank to extend his overdraft? Give reasons why he would takes this option.

Sam can use this option, mainly to avoid embarrassment in front his girlfriend. Another reason for this option is that he would think that may be bank will allow him to extend his overdraft easily, while he will repay it in instalments.

3. Use his Visa Card. Give two advantages and two disadvantages.

The main advantage of using Visa Debit Card is that it holds the person going out of credit, that it debits the amount from the bank account and does not allow an overdraft or an interest payment on transaction. Secondly, it is accepted widely and easily around the world.

The disadvantage of the Visa Card is that an amount is charged on each transaction done through the card. In times when extra cash is needed for urgent purchase, the Visa card with fewer amounts in the account is useless.

4. The shop Assistant offers a Zara store card. Sam has a 5 pounds sterling discount off clothes purchases for joining. Also a 10 pounds sterling off purchases over 100 pounds. He qualifies for a total 15 pounds discount on his purchases that day. Name 1 advantage and 2 disadvantages.

The only disadvantage in this situation is the 15 pounds discount on the total purchase. The disadvantages are that there will be no benefit in using credit or visa card. Furthermore, if Sam uses the card on discounted purchase, the interest will diminish the benefit of the discount.

5. In option 5, Sam realises he cannot afford to buy so many things and decides to buy what he can afford. Sam buys clothes up to 150 pounds .Explain the advantage and disadvantage of this option.

If Sam chooses the option 5, the advantage that he will get is the controlled budget and avoidance of interest payment, while the disadvantage of this option will be risk of losing his girlfriend.

6. You are Sam's friend he calls you for advice, what would you ...