Financial Knowledge Assessment: Q4A

4.  If you are unable to pay off the entire amount you owe in credit card debt, the best approach to pay off balances is to:

  • A.  Pay more than the minimum monthly amount due on all of your credit cards.
  • B.  Pay of the card with the lowest balance first.
  • C.  Pay the maximum your budget allows on the card with the highest balance.
  • D.  Pay the maximum your budget allows on the card with the highest interest rate.

Explanation:  The correct answer is “D.”  Credit cards are a great financial tool when used correctly, but they can quickly become very problematic if used incorrectly.  Many Marines and Sailors have spent beyond their means with credit cards, only to suffer high interest rates with increasingly difficult challenges in paying them off and finally getting out of debt.  Ultimately, Marines and Sailors who have made this mistake will end up paying significantly more of their hard-earned money in interest payments than they could have imagined.  Interest compounds for every billing period that you do not pay, hence the term “compounding interest.”  For example, imagine you have $1,000 outstanding on a credit card that has an Annual Percentage Rate (“APR”) of 20%.  After one month the accrued interest would be $17 (20% of $1,000 is $200, divided by 12 months in a year, equals $17).  Now, for the following month you will be accruing interest off of not only the $1,000, but also the $17 in interest from the previous month.  The concept of compounding interest also works in your favor if you take steps to minimize debt and maximize your savings and investments.

Continue to Question 5