Financial Maths, STD2 EO-Bank 6 MC

Grace repays her credit card gradually over several months. She notices that, although the interest rate on her card stays the same, the amount of interest charged changes from month to month.

This occurs because a credit card is an example of a reducing balance loan.

Which statement best explains why a credit card is an example of a reducing balance loan?

Interest is calculated on the outstanding balance, which reduces as repayments are made.
The interest rate decreases each time a repayment is made.
The same amount of interest is charged each month, regardless of the balance owing.
A fixed portion of the balance is repaid each month, with no interest charged.

Show Answers Only

\(A\)

Show Worked Solution

A is correct: interest is charged on the outstanding balance, which reduces as repayments are made – the defining feature of a reducing balance loan.

Other options:

B is incorrect: the interest rate stays fixed; it is the balance that reduces, not the rate.
C is incorrect: the interest charged is not fixed – it depends on the balance owing.
D is incorrect: interest is charged on a credit card, and repayments are not a fixed portion of the principal.

\(\Rightarrow A\)