Canada Grade 8 Math Understanding credit and debt

What is the main difference between a credit card and a debit card?

• A credit card allows you to borrow money up to a certain limit, while a debit card uses money directly from your bank account.

• A debit card allows you to borrow money up to a certain limit, while a credit card uses money directly from your bank account.

• Both cards allow you to borrow money up to a certain limit.

• Both cards use money directly from your bank account.

Answer explanation

The correct choice highlights that a credit card allows borrowing up to a limit, while a debit card directly withdraws from your bank account. This distinction is key to understanding how each card functions.

If you have a credit card balance of $500 and the annual interest rate is 12%, how much interest will you owe after one year if you do not make any payments?

• $50

• $60

• $120

• $600

Answer explanation

To calculate the interest, use the formula: Interest = Principal x Rate. Here, Principal = $500 and Rate = 12% (or 0.12). So, Interest = 500 x 0.12 = $60. Therefore, the correct answer is $60.

Which of the following is a benefit of using credit responsibly?

• It can help you build a good credit history.

• It allows you to spend more than you can afford.

• It eliminates the need to budget.

• It guarantees you will never have debt.

Answer explanation

Using credit responsibly can help you build a good credit history, which is essential for obtaining loans and favorable interest rates in the future. The other options do not represent benefits of responsible credit use.

What is the term for the amount of money you owe on a loan or credit card?

• Credit limit

• Interest rate

• Balance

• Minimum payment

Answer explanation

The term 'Balance' refers to the total amount of money you owe on a loan or credit card. It represents the outstanding debt, while 'Credit limit' is the maximum amount you can borrow, 'Interest rate' is the cost of borrowing, and 'Minimum payment' is the least amount you can pay each month.

If you make only the minimum payment on your credit card each month, what is likely to happen?

• Your debt will decrease quickly.

• You will pay more in interest over time.

• Your credit score will improve rapidly.

• You will not incur any interest charges.

Answer explanation

Making only the minimum payment on your credit card means you will carry a balance longer, leading to higher interest charges over time. This results in paying more in interest overall.

What is a credit score?

• A number that represents your income level.

• A number that represents your creditworthiness.

• A number that represents your spending habits.

• A number that represents your savings.

Answer explanation

A credit score is a number that indicates your creditworthiness, reflecting how likely you are to repay borrowed money. It is not about income, spending habits, or savings.

Which of the following is a consequence of not paying your credit card bill on time?

• Your credit score may increase.

• You may incur late fees and interest charges.

• Your credit limit will automatically increase.

• You will receive a reward from the credit card company.

Answer explanation

Not paying your credit card bill on time can lead to late fees and increased interest charges, negatively impacting your finances. The correct consequence is that you may incur late fees and interest charges.

If you borrow $1,000 at an interest rate of 5% per annum, how much interest will you pay in one year?

• $5

• $50

• $500

• $5,000

Answer explanation

To calculate the interest, use the formula: Interest = Principal x Rate. Here, Interest = $1,000 x 0.05 = $50. Therefore, the correct answer is $50.

What is the term for the maximum amount you can borrow on a credit card?

• Credit limit

• Interest rate

• Balance

• Minimum payment

Answer explanation

The term 'credit limit' refers to the maximum amount you can borrow on a credit card. It defines the upper boundary of your borrowing capacity, unlike interest rate, balance, or minimum payment, which relate to costs and obligations.

Which of the following is a strategy to avoid debt?

• Spend more than you earn.

• Pay your bills on time.

• Use credit for all purchases.

• Ignore your budget.

Answer explanation

Paying your bills on time helps maintain a good credit score and prevents late fees, which can lead to debt. The other options, like spending more than you earn or ignoring your budget, can increase the risk of falling into debt.