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 amount you borrowed. Compound interest is calculated on that original amount plus whatever interest has already piled up, meaning the balance can snowball faster than you'd expect. Most credit cards and many loans use compound interest.
Think of it like a small snowball rolling downhill: at first it barely grows, but the longer it rolls, the faster it picks up size. A $5,000 balance at 20% APR, if you only pay the minimum, can end up costing you thousands more in interest over a few years than the same balance paid off aggressively, which is exactly the 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 DIY Debt Payoff guide for the specifics.