Credit Cards

Personal Investment Question 1: ‘Credit cards are always a bad idea’ A credit card is a bank card that allows someone to borrow money for a short period, and repay it with interest. It is a loan facility that gives the bank customer access to borrowed money via card. The customer is expected to repay a certain percentage of the amount they owe every month. When a credit card owner fully pays their debt in a month, no interest is accrued.

Therefore, if wisely used, a credit card can be a source of interest-free debt. Similarly, if the card owner fails to pay back the minimum balance at the end of the month, they face penalty charges and high interest rates (Durkin, 2015). When this happens over an extended period, it may lead to unmanageable debt.

Factors to consider before acquiring a credit card Credit cards can be beneficial or the cause of deep financial stress depending on how they are used. When considering to get a credit card it is best to evaluate whether a credit card would help you financially or sink you into unmanageable debt. There are three main factors that an individual, as well as the financial institution, should evaluate before applying or issuing a credit card. The first criteria is a person’s financial history.

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A person with a history of defaulting payments, and making other poor financial decisions should not take apply for a credit card. Managing credit card debt requires a significant amount of financial knowledge and discipline. It is imperative to display the ability to exercise financial judiciousness.

The second criteria to consider when considering credit card application is the amount of money one earns, their monthly expenses and how much disposable income they have from their earnings. A person whose earnings all go into paying fixed expenses might become more financially strained when they get into credit card debt. It is crucial to completely avoid credit card if there is a likelihood that it will leave you in a worse off position. Therefore, people who have little to no disposable income are advised against using credit cards. The third criteria to consider is one’s credit score. The higher the credit score, the more qualified one is to own a credit card A low credit score, on the other hand, indicates that credit card debt would further deepen one’s financial problems. To better understand whether a credit card is a bad idea or not, it is crucial to analyze its merits and demerits.

Merits of a Credit Card When used prudently, credit cards have a number of advantages over making cash and debit card payments (Harrison, 2016). These include; firstly, it allows the card owner to save their money by spreading out the cost of a large purchase, especially when making a large purchase. This facility is useful especially in cases where one does not have all the funds required to pay for something immediately.

Secondly, credit cards offer purchase protection for purchases between £100 and £30,000 (Credit card and debit card protection explained, 2020). This means that in case the purchase is faulty or gets lost, or if the selling company goes bankrupt before it is able to deliver the

purchase, the credit card owner can still claim the money spent from the credit card provider.

Additionally, if the credit card is used fraudulently, the card owner has a right to claim for a refund of the money that is stolen as long as they can prove that they were not careless with the card. Thirdly, credit cards provide an avenue to get an interest free loan. Most financial institutions have an interest rate of 0% if the money is paid in full within a month. Fourthly, many credit cards offer several benefits such as earning loyalty points, entry into raffle draws and getting discounts at certain stores. Fifth, the judicious use of a credit card can help an individual to improve their credit rating.

Demerits of a Credit Card Credit cards are a risk to one’s financial standing due to the possibility of running into credit card debt that exceeds one’s ability to repay. Most credit cards charge high interest rates especially for borrowers who are not able to repay the full amount at the end of the month (Herold, 2020). This puts people in a continuous cycle of debt, where they are only able to repay the minimum amount they owe monthly, and the interests continue to accrue. The second disadvantage of using credit cards is that it can easily affect one's credit card rating negatively.

A low credit rating makes it challenging to be considered creditworthy for a loan in future. Thirdly, credit cards come with extra fees, penalties and charges when one fails to pay their debt on time or exceeds the credit limit. It is important to be very cautious with credit cards because they can easily cause major financial challenges. Fourthly, credit cards charge higher than normal interest rates (Roberts, 2015). As a result, repaying credit card debt can be very challenging and many people end up in financial distress from failure to effectively manage their credit card debt. Credit cards also have many hidden clauses that favor the company issuing the

card. It is important to understand all the terms and conditions before deciding whether to get a card.

Conclusion Credit cards can cause severe financial damage. This is evidenced by the fact that the demerits of using credit cards far outweigh the merits. Credit cards require a high level of financial prudence and discipline. They also work best when the card holder has a stable source of income and a good amount of disposable income so that they do not end up in a cycle of unmanageable debt. If you do not meet the criteria of the right candidate for using credit cards, it is advisable to opt out of owning one.

Question 3 A tax is a compulsory monetary contribution that the citizens of a country make to support the government and its activities. Taxes are the principle and most important revenue source for many governments globally. Taxes are charged at several points and in many different ways; from earning a salary, fuelling a car, dining at a restaurant, shopping in a supermarket, attending a concert and paying monthly bills. As a responsible and law-abiding citizen of a country, it is important to pay taxes as they fall due because it enables the government to provide crucial services and facilities to its citizens.

There are two categories of taxes; direct and indirect taxes. A direct tax is imposed directly on an individual and remitted to the government by the person on whom the tax is charged (Gaisbauer, Schweiger, and Sedmak, 2015). In essence, a direct tax can only be paid by the taxpayer, it cannot be transferred to someone else. An indirect tax, on the other hand, is one which is transferred to another person, group or business, by the person, group or business that owes it. Businesses charge higher prices for their goods and services to recover the taxes they

pay to the government. Ultimately, business and corporation are able to avoid the cost of taxes by passing it on to their stakeholders. The process of transferring a tax burden to a different entity is known as tax shifting.

The main types of direct taxes are, income tax, corporate tax, gift tax, wealth tax and fringe benefit tax (Gaisbauer, Schweiger, and Sedmak, 2015). In most countries, income tax is the most common type of direct tax. It is imposed on individuals and businesses on income earned such as salary, commissions, and profits. A gift tax is a tax charged on gifts and donations received, wealth tax is charged on one's property and estate, while fringe benefits tax is imposed on the benefits that an employer offers employees such as housing and car.

Direct taxes are beneficial to the economy in four main ways. Firstly, they generate revenue for the government. Secondly, they can be used as an instrument for controlling the monetary inflation rate. When there is high inflation, direct taxes are increased to reduce the amount of money in circulation. Thirdly, direct taxes are used to enhance equitability. People with high income pay higher taxes while people who earn low-income pay taxes at a lower rate.

Fourthly, direct taxes can be used as a method of reducing economic inequalities. The revenue generated from tax collection is used by the government to launch initiatives that benefit the poor.

Direct and indirect taxes differ mainly because the former are paid directly to the government while the latter are collected through an intermediary (Smith, 2015). These intermediaries include supermarkets, schools, hospitals, restaurants, airlines and schools.

Examples of indirect taxes are; custom duty, service tax and excise duty. Indirect taxes are beneficial to the government because they are easy to collect and there is minimal evasion. The disadvantages of indirect taxes accrue mostly to the taxpayer. It is a regressive tax system

because it forces everyone to pay taxes at the same rate regardless of their income. It also makes some products and services such that they are unaffordable by the poor.

Personal Taxation is a Good Thing Taxes are considered burdensome by many people, and it is common for people to look for strategies to evade or avoid them. However, paying taxes is the civic duty of every citizen of a country who earns an income. Taxes are so important to a country that avoiding them is punishable by law. They are used to promote economic growth and development and to ensure the wellbeing of the population (Whittenburg, Altus-Buller, and Gill, 2015). Personal taxes are imposed on the incomes and revenue streams of an individual to the extent of their tax liability.

These incomes include commissions, salaries, wages, dividends and interest. The taxes paid by individuals have a direct impact on their lives. However, this is dependent on the government’s ability to allocate the funds to the appropriate uses. Personal taxes are used to construct roads, railways, communication networks, schools, hospitals, and housing programs. The collected monies also fund social security, public health insurance and welfare schemes for the poor.

Taxation is, therefore, a good thing because it enables the government to better the lives of the population (Basu, 2016). For instance, the personal taxes a government collects help to ensure that the transport infrastructure of a country is well-developed and maintained. It also ensures that hospitals are adequately staffed and have the right equipment to treat patients. Public schools receive a significant proportion of their funding from the taxes imposed on the citizens of a country. Paying taxes ultimately benefits the taxpayer.

Personal taxation benefits taxpayers because it enables them to access facilities and services that they would otherwise have had to access through private suppliers at exorbitant costs. Taxes are also used to pay government workers who provide essential services to the

public. Taxes play a crucial role in facilitating the development, order, functionality and prosperity of a nation and its people. As such, taxpayers should honor their civic duty, but also hold the government accountable to ensure that the tax revenues collected are appropriated effectively.

Governments administer personal taxes to their citizens to attain three main objectives.

The first objective is to provide public services such as education, health and transport, and foster the growth of the economy. The second goal is to redistribute wealth. This is achieved by taxing rich citizens at a higher rate than the poorer citizens. This helps to promote government spending on programs that are specifically designed to benefit the poor. The government also used personal taxes to correct externalities. For instance, products that are harmful to the population such as tobacco and alcohol are heavily taxed to reduce the public’s consumption.

Reference Basu, S., 2016. Global Perspectives On Taxation Law. Routledge.

Durkin, T., 2015. Consumer Credit And The American Economy. Oxford University.

Gaisbauer, H., Schweiger, G. and Sedmak, C., 2015. Philosophical Explorations Of Justice And Taxation. Springer.

Harrison, T., 2016. Financial Literacy And The Limits Of Financial Decision-Making. Palgrave Macmillan.

Herold, T., 2020. High Credit Score Secrets. Thomas Herold.

Moneyadviceservice.org.uk. 2020. Credit Card And Debit Card Protection Explained. [online] Available at: <https://www.moneyadviceservice.org.uk/en/articles/how-youre-protectedwhen-you-pay-by-card> [Accessed 9 July 2020].

Roberts, R., 2015. Clear And Unbiased Facts Credit Card Debt. Lulu Press.

Smith, S., 2015. Taxation: A Very Short Introduction. Oxford: Oxford University Press.

Whittenburg, G., Altus-Buller, M. and Gill, S., 2015. Income Tax Fundamentals. Cengage Learning.