10. Free Compound Interest Calculator

When Einstein was asked what was mankind’s best invention, he answered “Compound Interest”. Many people do not understand the power of compound interest, but the banks and credit card issuers do. Compound interest is where the interest is added to the balance before calculating the next period’s interest. In other words £10.00 + 10% = £11.00, £11.00 + 10% = £12.10.

Here’s an extreme example: If you start at the beginning of the month with one penny and add one penny per day, you would end up with 32 pence after 31 days. How much do you think you would have if you simply doubled the amount every day? The answer is staggering (bottom of page) – this is compound interest.

Take Barclaycard for instance. The current rate on my Barclaycard is 2.04%. In other words I pay £2.04 per month for every £100 credit I use. It doesn’t seem much and if that money were invested at a flat rate you would get back £364 in ten years (120 x 2.04). Three times your money in ten years sounds pretty good until you see what compounding does.

The same £100 at 2.04% compound would be worth £1361.78 after ten years – which is exactly what the credit card issuers are doing with people who keep a high balance on their cards. These ‘revolvers’ as they are known, are the industry’s golden geese. These are also the people most likely to miss payments and incur the charges that are reputed to make up 12.5% of banks’ profits.

How often do banks calculate compound interest? Although you only see your charges on a monthly basis, it’s advantageous to the banks to compound on a daily basis, so of course that’s what they do.

To find out how much your charges have cost you over the years (or how much the issuers have profited with your money),