Part 1 Respond To This Discussion Below Suppose Your Friends

Part 1 Respond To This Discussion Belowsuppose Your Friends Mary An

Suppose your friends, Mary and John, received their first credit cards with identical features. Mary uses her card extensively to make purchases, always paying the full balance in a timely manner so that she incurs no interest cost. John pays for everything in cash, reserving the credit card only for an emergency that never happened. After two years, your friends apply for a new credit card. Explain why Mary is offered a new card at a much lower interest rate than John, despite of the fact that they have similar jobs and make the same amount of money.

Paper For Above instruction

The differing interest rates offered to Mary and John when applying for a new credit card can be primarily attributed to their respective credit histories and demonstrated creditworthiness, rather than solely their income or employment status. Financial institutions assess risk based on credit reports, which encompass factors like payment history, credit utilization, length of credit history, and overall credit management behavior. Mary's extensive use of her credit card, always paying the full balance on time, consistently demonstrates responsible credit management, thereby establishing her as a low-risk borrower. This positive credit behavior results in her being perceived as more creditworthy, enabling her to qualify for a new credit card at a lower interest rate.

Conversely, John’s approach—which involves paying cash and reserving his credit card for emergencies—limits the credit information available to lenders about his borrowing behavior. Although he has the same income and Job stability as Mary, his limited credit activity signifies a lack of recent credit experience, leading lenders to view him as a higher risk. Without a length of responsible credit use, his credit score remains lower or less favorable, which consequently results in higher interest rates on any newly issued credit cards.

Additionally, the act of regularly using one’s credit card and paying the full balance demonstrates to lenders that the individual can responsibly manage debt and avoid interest charges—traits desirable for favorable lending terms. Mary’s responsible credit use over those two years signals financial discipline and reliability, which reduces the lender’s risk. On the other hand, John’s minimal use offers limited evidence of his ability to handle credit responsibly, which elevates his perceived risk in the eyes of lenders.

This distinction underscores the importance of credit activity as an indicator of financial responsibility for borrowers. Financial institutions rely heavily on credit scoring models like FICO or VantageScore, which weigh various factors, including payment history and credit utilization, to determine interest rates. A history of timely payments and responsible credit use, as demonstrated by Mary, improves credit scores, thus enabling access to lower interest rates. John’s limited credit activity, despite his financial stability, hampers his credit score's growth and results in less favorable lending terms.

In sum, the primary reason for the difference in interest rates offered to Mary and John is the credit information reflected in their credit reports. Mary’s consistent and responsible use of credit has built her a strong credit profile, leading lenders to offer her more advantageous terms. For individuals seeking better borrowing terms, establishing and maintaining responsible credit habits—making timely payments, keeping credit utilization low, and managing credit accounts prudently—are essential strategies.

References

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