 TITLE: How Does Compound Interest Work? CONTENT: How Does Compound Interest Affect Debt?\n---------------------------------------\nWhile compound interest can help your savings grow more quickly than it would with simple interest, it can also work against you when you're borrowing money.\nMany credit cards compound interest daily on average daily balances. While the calculation is complicated, the bottom line isn't: Compound interest on credit cards adds to your debt when you carry over a balance from month to month. The (often high) interest rate and daily compounding are two reasons paying off credit card debt can be difficult—and why you should always try to pay your credit card balance in full each month. That way you're charged zero interest and don't have to worry about compounding interest on your debt at all.\nSome types of loans, such as federal student loans and mortgages, generally don't have daily compounding interest. As long as your monthly payment covers the accrued interest, then the interest doesn't compound.\nHowever, if your monthly payment doesn't cover the monthly interest, then your overall loan balance may grow—what's known as negative amortization. If the unpaid interest gets added to your principal balance, then the interest rate may apply to that larger balance (in other words, the interest compounds).\nWhen you're applying for any type of loan, but especially a large loan, make sure you understand how interest accumulates and when it compounds (if at all). END