Understanding Interest
Interest is the cost of borrowing money — or, on the savings side, the return you earn for letting someone else use your money for a while.
Simple vs. Compound Interest
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus any interest already accrued — meaning the balance can grow faster over time. Most credit cards and many loans use compound interest.
Illustrative example only: a $5,000 balance at 20% APR compounding monthly, paying only the minimum, accrues meaningfully more total interest over several years than the same balance paid off aggressively — which is the core logic behind our debt payoff strategies.
Why This Matters for Both Debt and Savings
Compound interest works against you on debt and for you on savings — the same mechanism, opposite direction. Understanding it is part of why paying more than the minimum matters; see our Minimum Payments page for the specifics.