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Getting to know simple and compound interest

Getting to know simple and compound interest

To understand how interest affects your outstanding balance and payments, it’s important to get to know simple and compound interest. We’ve created an example to show you how it works.

An example to show how compound interest works

To show you how compound interest affects a balance over time, we’re going to use a made-up example based on a business borrowing £1,000 at a simple interest rate of 12%. For the sake of the example, let’s say that the business doesn’t pay anything back for 12 months. Note that this example is just to show how compound interest works – it is not related to any specific financial product or service.

What happens to your balance each month?

The business borrowed the money in December, so interest is charged for the first time in January. Their yearly simple standard rate is 12%, so their monthly simple rate is 1% (the simple standard rate divided by 12). Because the business doesn’t pay, their £1,000 balance (plus 1% interest) is rolled over to February when interest is charged again. This time interest is charged not only on the original balance but also on the interest from January – we call this compound interest.

This example shows how interest affects the businesses balance over 12 months. We’ve rounded the figures to the nearest 1p. You’ll see how the longer you take to pay off your balance, the more it will cost.

A business borrows the £1,000 in December, so interest is charged for the first time in January

What compound interest means for you

With compound interest, interest is charged on interest from the previous month. So the longer it takes to clear your balance, the more you’ll pay in compound interest. It’s important that you try to clear your balance as quickly as you can. If you have problems with your credit score, this becomes even more important. Read our ‘How To Improve Your Credit Score’  guide to learn more.

With Barclaycard Payments, you must pay the minimum amount each month

Remember that this is just an example to show how compound interest works. With a Barclaycard business credit card, you must pay at least the minimum amount each month. If you don’t pay your monthly payment on time, you may be charged a fee. Also, your credit rating could be affected, making it harder for you to get credit in future. Please refer to ‘How Is Credit Card Interest Charged‘, in your T&Cs’ to find out more.