How interest works
When you borrow, interest is the price of using someone else's money. On many products, if a balance is not paid in full, interest is added to it, and next time interest is charged on the larger balance. This is compounding, and it is why debt can grow faster than people expect.
A simplified example: $1,000 on a card at 24% APR is charged roughly 2% a month.
| Month | Starting balance | Interest (2%) | Payment | Ending balance |
|---|---|---|---|---|
| 1 | $1,000.00 | $20.00 | $0 | $1,020.00 |
| 2 | $1,020.00 | $20.40 | $0 | $1,040.40 |
| 3 | $1,040.40 | $20.81 | $0 | $1,061.21 |
Without payments, the balance grows every month, and the growth itself grows.
What APR tells you
APR (annual percentage rate) expresses the yearly cost of borrowing as a percentage, and for many products it includes certain fees. It is the single best number for comparing debts: the higher the APR, the more that debt costs you per dollar owed.