Which payment method is most likely to incur interest charges if not paid in full
A) Cash
B) Debit card
C) Credit card
D) Prepaid card
The correct answer and explanation is:
The correct answer is C) Credit card.
A credit card is the payment method most likely to incur interest charges if the balance is not paid in full. Here’s how it works: when you use a credit card, you are essentially borrowing money from the bank or financial institution that issued the card. Credit cards typically offer a grace period, which is the time between the end of the billing cycle and the due date. If you pay your balance in full during this grace period, you won’t be charged any interest. However, if you carry a balance beyond the due date, interest will be applied on the remaining amount, usually at a relatively high rate.
Interest is calculated on the outstanding balance and compounds daily or monthly, depending on the credit card issuer. This means that the longer you take to pay off your balance, the more interest will accumulate. Additionally, credit cards often charge higher interest rates compared to other forms of credit, making it more expensive to carry a balance over time. Credit card interest rates can vary, but they typically range from 15% to 30% annually, depending on the cardholder’s credit history and the card issuer’s terms.
In contrast, cash and debit cards do not incur interest charges, as these methods involve using your own money directly. Prepaid cards also do not charge interest because they are preloaded with a set amount of money. However, some fees may apply depending on the specific prepaid card, but they do not involve interest accumulation like credit cards.
To avoid interest charges on a credit card, it’s important to pay off the balance in full by the due date.