Final answer:
If a creditor estimates a charge for a service not performed, it can lead to an overcharged individual who should dispute the charge. Banks plan for unpaid loans, but excess defaults can cause financial strain. Personal financial strategies, like mental accounting, often result in decisions that aren't economically sound.
Step-by-step explanation:
When a creditor estimates a charge for a service that is not actually performed, it typically results in an inaccurate billing statement that may lead to the individual being overcharged. If this charge appears on a credit card statement, the cardholder should contest the charge with the credit card company to have it removed. Banks and creditors generally have processes in place to handle such disputes and correct the error. A well-run bank also includes estimations in its financial planning to account for the risk of unpaid loans.
Incorrect charges can occur for a variety of reasons, including clerical errors, misunderstandings about agreed services, or technical issues. On the other hand, mental accounting often leads individuals to make financial decisions that might not be economically wise, such as carrying a high-interest credit card balance while having funds in a low-interest savings account. Recognizing and resolving these billing errors or re-evaluating personal financial strategies can prevent unnecessary financial losses.
Creditors and banks must also prepare for the risk of loan defaults. When defaults exceed the anticipated amount, such as during a recession, it can lead to significant financial strain on the institution, potentially resulting in a negative net worth for the bank.