Which of the following actions would most responsibly help Elizabeth pay off her bill sooner and reduce her overall interest expense?

• A. Only pay the minimum amount due each month
• B. Wait until the due date to make a single large payment at the end of the year
• C. Skip a payment and pay double the next month
• D. Make payments larger than the minimum required each month

Answer: (D)

Verified step by step guidance

1. Understand the concept of interest expense: Interest expense is the cost incurred for borrowing money, and it is typically calculated based on the outstanding balance of a loan or credit card. Paying off the balance sooner reduces the principal amount on which interest is calculated, thereby lowering the overall interest expense.
2. Analyze the options provided: Paying only the minimum amount due each month will keep the balance high for a longer period, resulting in higher interest expense. Waiting until the end of the year to make a single large payment allows interest to accumulate over time, which increases the total cost. Skipping a payment and paying double the next month may lead to penalties and additional interest charges.
3. Identify the most responsible action: Making payments larger than the minimum required each month reduces the principal balance faster, which decreases the amount of interest accrued over time. This approach is financially responsible and helps Elizabeth pay off her bill sooner.
4. Apply the concept of compounding interest: Credit card interest is typically compounded daily or monthly. By reducing the principal balance earlier, Elizabeth minimizes the compounding effect, which further reduces her overall interest expense.
5. Plan a payment strategy: Elizabeth should review her budget to determine how much she can afford to pay above the minimum each month. Consistently making larger payments will help her achieve her goal of paying off the bill sooner and reducing interest costs.