Ask The Piggy Bank: What is Compound Interest?
March 3, 2008 by Miranda Marquit
Filed under Interest rates, Money advice, Mortgage and Loans
I recently received this question from an interested reader:
What is compound interest?
This is a great question that takes us back to Money 101.
Compound interest is an interest charge on both the principal of a loan and the interest. This means that the interest charge is added to the balance of the loan, and you are charged interest on both. (Simple interest, by contrast, is charged only on the principal of the loan.)
One of the reasons that credit card debt is so hard to pay off is that it works on compound interest. Not only that, but credit card interest charges are often accrued daily. This means that at the end of every day, your interest rate is figured and then added to the balance. Then you pay interest on the principal and the interest charges you are accruing.
Of course, the upside to compound interest is that it can work for you if you save your money in the right kinds of accounts.
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