Compound interest definition

Compound interest is interest calculated on both the original principal and the interest already added in earlier periods. It applies to savings accounts, deposits, bonds, loans, credit cards, and investment returns.

Each period's interest is added to the balance, so the next period's interest is worked out on a larger base. The effect grows with time and with how often interest is compounded, so a longer term and more frequent compounding both increase the final amount.

Compound interest differs from simple interest. Simple interest is charged only on the original principal, so it adds the same amount each period; compound interest also charges interest on the accumulated interest, so the amount added rises each period. Over a long horizon that gap can become large.