Glossary term
Compound Interest
Compound interest is interest earned or charged on both the original principal and the interest that has already built up. Each period's interest is added to the balance, so the next period's interest is a little larger. Over long stretches, compounding makes savings grow faster and unpaid debts grow faster too.
Updated October 17, 2026 · Editorial Team
How Compound Interest works in practice
The general formula is A = P × (1 + r ÷ n)^(n × t), where P is the starting balance, r the annual rate, n the compounding periods per year and t the number of years. The key ingredient is time: the longer interest stays in the balance, the more of your growth comes from interest on interest.
Deposit $10,000 at 5.00% compounded once a year and leave it for 10 years. The balance becomes $10,000 × 1.05^10 = $16,288.95. Simple interest at the same rate would give $15,000.00, so compounding adds $1,288.95 over the decade.
On the borrowing side, a credit card balance you do not pay off compounds the same way, which is why carrying a balance gets expensive. On the saving side, starting early matters more than nearly any other choice, because extra years give compounding more rounds to work.
Compound Interest: quick questions
How often does interest compound?
It depends on the account or loan. Savings accounts commonly compound daily or monthly, many CDs monthly, and credit cards typically daily.
Does compound interest apply to debt?
Yes. Unpaid interest on credit cards is added to the balance and then charged interest itself, which is why balances can grow even with small purchases.
How can I make compounding work for me?
Start saving as early as you can, leave earnings in the account, and choose accounts with a higher APY.
Sources
- Compound Interest Calculator — U.S. Securities and Exchange Commission (Investor.gov). Accessed October 17, 2026.
- Compound interest (glossary) — U.S. Securities and Exchange Commission (Investor.gov). Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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