Introduce yourself to a nifty little thing called interest. Interest is expressed as a percentage. It represents how much you make, or you owe, on money you have lent  (someone owes you interest) or borrowed (you owe someone else interest). Whatever that percentage is is called your interest rate. A bit confused? Don’t worry, keep reading. The examples will help.

Let’s start with the fun type of interest first – the kind that makes you money when you put money away for savings. If you put $100 in the bank and the bank offers you an interest rate of 5% on your money, then after a year you will have $105! Now that’s the kind of interest that’s actually interesting. 

Now the not-so-fun type of interest. When you borrow money, people want to be sure not only that they get their money back from you, but they want a little interest (a little reward for lending you the money). Let’s say you had a fun day at the park and you used your credit card to buy $100 worth of pink fuzzy dice for five friends. If you don’t pay your credit card bill on time, the credit card company will make money off of that purchase. Card companies vary, but for instance, they might charge you 14%APR (Annual Percentage Rate – tricky term) interest on the borrowed money. That means, if you don’t pay them the amount you borrowed ($100) the first month, you will owe them $112 the next month. And that money will continue to be charged interest each month you don’t pay it… $125.44 in total month two, $140.49 month three and so on. Can you say, that stinks?