General Education Development (GED) Practice Exam

If Frank has significant credit card debt at a high interest rate, what is a recommended use of a windfall or bonus?

1. Invest it in stocks immediately

2. Save a portion and pay down credit card debt with the rest

3. Pay off only the minimum balance

4. Use it for leisure activities

The correct answer is: Save a portion and pay down credit card debt with the rest

Using a windfall or bonus to save a portion and pay down credit card debt is a prudent decision, especially when the debt carries a high interest rate. Credit card debt is typically one of the most expensive forms of debt, with interest rates often soaring above other borrowing options. By allocating a significant part of this unexpected income toward reducing this debt, Frank can decrease the total amount of interest he will have to pay over time, which can lead to substantial long-term savings. Additionally, saving a portion of the windfall is also important because it creates financial stability and can serve as an emergency fund. This balanced approach reduces debt while also building savings, which can provide a cushion for future financial needs. In contrast, investing immediately in stocks presents risk, especially if Frank has high-interest obligations, as the market can be unpredictable. Paying only the minimum balance on credit cards prolongs the debt and increases the total interest paid. Using the bonus solely for leisure activities does not address the pressing issue of debt and could lead to further financial hardship down the line.