Interest is quite possibly the most complex bit of math that the average person has to use everyday.

When interest works for you, it can make you a ton of money.

When it works against you, it can cost you big.

But you’re gonna wanna know how it works to take advantage.

Fortunately, we can explain both cases.

Most ways you encounter interest are a variant on this theme, though.

Here’s how they work.

Compound interest works like this: you start with an initial balance, say $10,000.

Your interest earns its own interest (in this case, an extra $100).

This is an exceptional way for your money to make more money.

Your $10,000 made $17,000 in regular returns, but nearly $25,000 in compound returns.

For an extra $100 every month, your total investment by the end will be$130,564.

Compound interest is a huge factor in how your long-term investments work.

To put it in MMORPG terms, it’s like stacking more and more buffs over time.

For everyone else: it’s really, really good.

Interest on a credit card is calculated with anAnnual Percentage Rate(or APR).

The APR is the percentage of your bill that will be charged over a year.

So, say that you buy a TV for $1000 on a card with a 24% APR.

You’ve now paid more in interest than you did for the TV itself!

In other words, there’sabsolutely nothing worsethan paying only the minimum monthly payment.

Of course, the counterpoint to this is thebest possible use case:pay off your credit cards immediately.

The one way around this is to pay off your balance immediately.

Interest is only charged on balances carried from month to month.

If you never carry one for longer than a month, you’re golden.

Most loans work along fundamentally similar principles to credit cards.

The other part iswhenthat interest is applied.

In the credit card example above, interest is applied monthly, and it’s due immediately.

This isn’t the only method of applying interest.

Be sure to check your credit card terms for specifics.

Delayed Interest:Student loans in particularallow for interest to be delayed until a set time.

Interest Applied to Principal:In the credit card example above, the interest was due immediately.

For some credit cards and loans, this isn’t always the case.

Interest can be applied to your principal, which means it compounds as you pay it off.