How does paying off the full credit card balance each month help a user avoid finance charges?

• A. By increasing the credit limit automatically
• B. By reducing the minimum payment required
• C. By improving the card's reward rate
• D. By eliminating the outstanding balance before interest is applied

Answer: (D)

Verified step by step guidance

1. Understand the concept of finance charges: Finance charges are the interest fees applied to the outstanding balance on a credit card if the balance is not paid in full by the due date.
2. Recognize the relationship between paying off the full balance and avoiding finance charges: When the full balance is paid off each month, there is no remaining balance for interest to be calculated on, effectively eliminating finance charges.
3. Clarify why paying off the balance does not affect other factors: Paying off the balance does not automatically increase the credit limit, reduce the minimum payment required, or improve the card's reward rate. These are unrelated to the avoidance of finance charges.
4. Understand the timing of payments: Paying off the balance before the due date ensures that the credit card issuer does not apply interest to the outstanding balance.
5. Conclude the benefit: By eliminating the outstanding balance before interest is applied, the user avoids finance charges, saving money and maintaining financial health.