Compounding interest

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Compounding interest is interest that is earned on interest. So if you have $10 in the bank and you earn $1 in a year, the next year you will be earning interest on $11. Over time the amount grows. Of course the same thing is true of debt if you owe $10 and are charged $1 in interest, you will need to pay interest on $11 during the next period. In this way it is easy for a small amount of debt to grow into a very large amount. This is particularly true with credit card debt, where interest rates may be around 24%.