There are several different ways of calculating different types of interest. Simple interest is the most basic type of interest and the easiest to calculate and understand. The simple Interest is calculated with simple formula I=p*r*t (interest=principal*rate*time period). Savings account interest is possibly the most common type of interest that individuals earn. For many saving account’s interest is calculated monthly, using a method called annual percentage yield (APY). APY is the amount of interest a person earns over a year. The difference between savings account interest and simple interest is, in the earlier one, compounding is done to the account.
More interest can be earned, if the interest compounds repeatedly. Credit card interest is calculated using an average daily balance, and there can be additional increase in interest rate if the balance is carried from month to month. Those who pay their credit cards in full each month are not normally charged interest. Credit card interest is calculated using a seperate set of rules different from mortgage interest, as per the terms of agreement. Amortized interest (like what you pay on mortgage or car loans) is another type of interest that many people will experience. In this type of interest, the amount on the loan is calculated such that all of the interest due each month is paid plus a small amount of the principal. The principal amount becomes slightly smaller when the payment is done each time.
More interest can be earned, if the interest compounds repeatedly. Credit card interest is calculated using an average daily balance, and there can be additional increase in interest rate if the balance is carried from month to month. Those who pay their credit cards in full each month are not normally charged interest. Credit card interest is calculated using a seperate set of rules different from mortgage interest, as per the terms of agreement. Amortized interest (like what you pay on mortgage or car loans) is another type of interest that many people will experience. In this type of interest, the amount on the loan is calculated such that all of the interest due each month is paid plus a small amount of the principal. The principal amount becomes slightly smaller when the payment is done each time.
