What is Interest?
Interest is a percentage of money that’s added to what you owe or what you earn. You earn interest by saving money in a bank account or making investments like bonds. You pay interest when you borrow money, like through a loan or credit card.
Interest on Credit Cards and Loans
When you use a credit card, you don’t have to pay interest if you pay off the full balance on time. But if you only pay part of it, you’ll owe interest on the unpaid amount. Credit card interest is based on the annual percentage rate (APR), and it can add up fast! That’s why it’s smart to pay off your bill every month if you can.
When you take out a loan, you’re not just paying back the amount you borrowed—you’re also paying interest on it. To find the best loan, you need to look at both the amount you’re borrowing (called the principal) and the interest rate. The length of the loan and any extra fees also affect how much it’ll cost you in the end.
Interest Rates: Simple vs. Compound
Banks offer interest on savings accounts with something called a nominal rate. For example, if you put $1,000 in a savings account with a 5% interest rate, you’ll earn $50 in a year.
But here’s where it gets interesting: if the bank offers compound interest, you’ll earn even more. With compound interest, the money you earn starts earning interest too. So, if your account compounds daily, monthly, or quarterly, you’ll end up with more cash over time compared to simple interest, which only applies to your original deposit.
Understanding how interest works can help you make smart choices when saving, borrowing, or using credit—so keep an eye on those rates!