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What Is Interest?

Interest works to your advantage in the case of a savings account, but can pose serious risk to your credit card and loan payments.
What Is Interest - ABCs Of Finance


  1. a sum paid or charged for the use of money or for borrowing money.
  2. such a sum expressed as a percentage of money borrowed to be paid over a given period, usually one year

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Interest On Savings And IRAs

Interest rates are variable percentages that effect the principal balance of any given account. These rates have a positive impact on checking, savings, and investment accounts by contributing a small percentage of the principal to the account balance each month. The rates vary between accounts and financial institutions so its important to shop around. Keep in mind that even with competitive rates, these payments can take years to accrue for accounts with smaller balances.

Credit Cards & Loans

Since credit cards and loans are debts payed out, the interest rate affects them differently. In this case, they increase your principle based on the amount of money you still have borrowed which ultimately increases your overall payment if you do not keep up with your balance. Do not get caught up in the hype of getting points or cash back using these methods. You’ll end up paying for it on the back end. One way to combat high interest charges when using a credit card is to pay the balance off before the end of your monthly credit cycle.

Variable or Fixed Rates

When shopping around for credit cards and other debt options you must consider fixed rate and variable rate plans. A fixed rate is essentially set in stone for the duration of the agreement. Most financial institutions offer variable rates for their services so they can reserve the right to increase or lower your rate as the market changes. Their interest is determined by rates set at the federal reserve.

Gaming The System

One way to take advantage of these funds considering the risk is to only use them on business expenses and other means of generating income. Doing this allows you to float start up costs for a small side business. Using the credit as leverage to make more money is considered good debt as it will be an asset and not a liability. Regardless of the expenses, one other key tip for credit cards specifically is to keep a balance below 30% of your total available credit. Any more than that and your credit score may be affected.

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