Why do credit cards typically charge 20–30% APR while mortgages for the same borrower charge 6–8%?
ACredit cards are regulated differently and are legally permitted to charge higher rates
BMortgages are subsidized by the government while credit cards are not
CMortgages are secured by collateral the lender can seize, reducing default risk; credit cards are unsecured, so the lender has no recourse beyond collections
DCredit card companies take on shorter-term risk which paradoxically commands a premium
The rate difference is fundamentally about lender risk. A mortgage lender who is not repaid can foreclose and recover the property — the collateral backstops their exposure. A credit card lender who is not repaid has no such recourse: they can report to credit bureaus, sell the debt to collectors, or sue, but they have no asset to seize. This higher default risk is priced directly into the interest rate. The secured/unsecured distinction is not administrative — it is the mechanism that determines cost of borrowing.
Question 2 Multiple Choice
A borrower carries a $2,400 balance on a credit card with a $3,000 limit. They make every minimum payment on time. Beyond the interest they owe, what financial risk does this high balance create?
ANone — on-time payments are the only factor that affects creditworthiness
BTheir credit utilization ratio (80%) is very high, which significantly damages their credit score even though they are current on payments
CThe balance will automatically be reclassified as installment debt by the lender after 90 days
DHigh revolving balances trigger mandatory credit limit reductions by law
Credit utilization — balance divided by credit limit — is one of the most heavily weighted factors in credit scoring. An 80% utilization rate ($2,400 ÷ $3,000) signals high credit stress and substantially damages the credit score, regardless of payment history. On-time payments matter, but utilization is scored independently. This is a key insight about revolving credit: carrying a high balance hurts you even if you never miss a payment.
Question 3 True / False
Revolving credit differs from installment debt in that it can be borrowed against repeatedly up to the credit limit, without a fixed repayment schedule or end date.
TTrue
FFalse
Answer: True
This is the defining characteristic of revolving credit. Unlike installment debt (e.g., a car loan with 60 fixed payments and a closing date), a revolving line lets you borrow, repay, and borrow again continuously. The account remains open indefinitely. This flexibility is what makes revolving credit both useful and potentially dangerous — there is no natural forcing function to eliminate the balance.
Question 4 True / False
Carrying a high balance on a revolving credit account mainly affects how much interest you pay — it does not impact your credit score.
TTrue
FFalse
Answer: False
Credit utilization (balance ÷ limit) is scored as an independent factor from payment history. A $2,400 balance on a $3,000 card represents 80% utilization, which scores as high-risk regardless of whether payments are on time. Credit scoring models treat utilization as a forward-looking signal of financial stress. This is why financial advisors recommend keeping revolving balances below 30% of limits — not just to reduce interest, but to protect the credit score.
Question 5 Short Answer
Why do secured loans typically carry lower interest rates than unsecured loans for the same borrower?
Think about your answer, then reveal below.
Model answer: Secured loans are backed by collateral — an asset the lender can seize if the borrower defaults. This recourse reduces the lender's risk: even if the borrower stops paying, the lender can recover value from the asset. Unsecured loans have no such backstop; if the borrower defaults, the lender's only options are collections and lawsuits, which recover far less. Lower risk for the lender translates directly into a lower interest rate for the borrower.
Interest rates are a price for risk. The lender is being compensated for the probability that they will not be repaid. When that probability is reduced by collateral, the compensation demanded falls. This is why the same person can simultaneously hold a 7% mortgage and a 25% credit card — the risk profile of each instrument is different, and the rates reflect that. Understanding this principle predicts why any debt with collateral (auto loans, secured personal loans) costs less than comparable debt without it.