Which payment method is described as having a potential for interest charges?
a. Prepaid Debit
b. Debit Card
c. Credit Card
d. Cash
The correct answer and explanation is:
The correct answer is c. Credit Card.
A credit card is a payment method that allows consumers to borrow money up to a certain limit to make purchases or pay for services. Unlike debit cards, which draw directly from your bank account, credit cards create a line of credit that must be repaid. If the balance on a credit card is not paid off in full by the due date, the issuer typically charges interest on the remaining balance. The interest rates on credit cards can be high, sometimes exceeding 20% or more annually, depending on the card and the issuer.
Credit cards offer benefits such as building a credit history, earning rewards, and providing protection against fraud. However, if the balance is not paid off within the grace period, interest begins to accumulate, making the cost of purchases more expensive. The interest is compounded, meaning that the longer the balance is carried, the higher the total amount owed becomes.
In contrast, prepaid debit cards and debit cards do not involve borrowing money. Prepaid cards require funds to be loaded onto the card in advance, while debit cards draw directly from the user’s checking or savings account. Neither of these payment methods incurs interest charges because they are not based on credit.
Cash is a physical form of money and does not involve any credit or borrowing, so there is no potential for interest charges.
Understanding how interest works with credit cards is important to avoid accumulating debt. By making timely payments and managing balances responsibly, users can take advantage of credit card benefits without falling into financial trouble.