Math 1 · Unit 8 · Lesson 5 · part 3 of 5
Interest can work against you
Compound interest is wonderful when the bank pays you.
Interest can work against you
Compound interest is wonderful when the bank pays you. It works exactly the same way when you owe the money. A loan or a credit card balance that is not paid grows by compound interest, the same growth factor, the same formula.
Savings: it works for you
$1,000 saved at 5% a year: 1000(1.05)t. After 5 years you have $1,276.28.
A card: it works against you
$1,000 owed at 20% a year, nothing paid: 1000(1.20)t. After 5 years you owe $2,488.32, more than double.
Same family, same formula. The only difference is which side of it you are on, and the size of the rate. High rates and long times are good for savings and bad for debts.