Compound Interest
Growth that earns on prior growth, which is why the holding period matters more than the rate.
Simple interest pays on the original balance only. Compound interest pays on the original plus everything earned so far, so the base grows each period and the increments grow along with it.
$10,000 at 7% for 30 years reaches $76,123. Simple interest on identical terms reaches $31,000. The rate is the same in both cases and the entire difference is interest earning interest.
The mechanism has no preferred direction. Card balances compound on exactly the same arithmetic, which is why a balance carried at 24% outruns the intuition most people build from watching a savings account.
Worked through
$10,000 at 7% annually
| Time | Value |
|---|---|
| Year 1 | $10,700 (+$700) |
| Year 10 | $19,672 (+$9,672) |
| Year 20 | $38,697 (+$28,697) |
| Year 30 | $76,123 (+$66,123) |
See your own compound interest
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