The Correct Answer and Explanation is:
Based on the options provided in the image, here is the correct categorization for the financial situations before and after obtaining credit.
Correct Answer
Before Obtaining Credit:
- Limited to the funds available in your bank account or the cash you have.
- Need to build up savings.
After Obtaining Credit:
- Able to purchase a home or a car.
- Able to develop a credit history.
- Able to make reservations for a hotel or rental car.
Explanation
Obtaining access to credit marks a significant transition in an individual’s financial life, fundamentally altering their purchasing power and financial opportunities. The classification of these statements reflects the distinct limitations and advantages of each stage.
Before a person establishes credit, their financial transactions are entirely dependent on their existing capital. Spending is limited to the funds available in your bank account or the cash you have. This direct relationship between available money and spending capability means that for any large expenditure, such as buying a car or a major appliance, one must first save the entire amount. Therefore, there is a distinct need to build up savings over an extended period to achieve significant financial goals, as borrowing is not yet an option. This phase is characterized by living strictly within one’s immediate means.
Once an individual obtains credit, a new range of financial tools becomes available. A primary benefit is the ability to finance major life purchases. You become able to purchase a home or a car through specialized loans like mortgages and auto loans. This allows you to acquire high value assets and pay for them over time rather than needing the full price upfront.
Furthermore, the act of borrowing and repaying money allows you to develop a credit history. This record of your financial responsibility is essential, as lenders use it to determine your reliability for future credit. A positive history can unlock better interest rates and more financial products. Lastly, credit provides practical conveniences. Many services, like hotels and car rental agencies, require a credit card to secure a booking, making you able to make reservations for a hotel or rental car with ease.
