Compound interest

Interest charged or earned on earlier interest, not just on the original amount.

With compound interest, interest is added to the balance, and the next round of interest is figured on that larger balance.

For savings, it works in your favor: $1,000 earning 5% a year becomes $1,050 after one year and $1,102.50 after two. The longer it grows, the faster it grows.

For debt, it works against you. Unpaid credit card interest becomes part of the balance and is charged interest too, which is why balances can grow even when you make payments.