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What does a bank actually do when a cardholder pays a shop with a credit card?
AIt moves money out of the cardholder savings account
BIt records the purchase as a time deposit of the shop
CIt converts the purchase into currency in circulation
DIt gives a short-term loan by paying the seller direct
Answer & Solution
Correct answer: D. It gives a short-term loan by paying the seller direct
1. When a bank issues a credit card to a consumer it is offering a borrowing facility, not handing over money.
2. At the moment of purchase the bank gives the consumer a short-term loan by directly paying the seller.
3. The consumer then pays the credit card company after receiving the monthly statement.
4. No balance leaves the cardholder account at the till, so the savings account answer describes a debit card instead.
5. Nothing is added to currency in circulation, because currency means coins and paper money only.
6. The shop receives a payment, not a locked deposit, so no time deposit is created by the transaction.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.1 Show Me the Money_
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