How Compound Interest Helps or Hurts https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/how-compound-interest-helps-or-hurts Compound interest is an important concept and can really benefit

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How Compound Interest Helps or Hurts

https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/how-compound-interest-helps-or-hurts

Compound interest is an important concept and can really benefit you in the long term. "Compound interest is the ability for your money to make interest on the interest. Contributions to a 401(k) retirement plan demonstrate this perfectly. Assume you started a 401(k) account and deposited $19,500 each year (the maximum allowed contribution for 2020 for people younger than 50), and earned 10% per year. In eight years, you would be earning $22,000 per year in interest alone."

This article talks about the negatives of compound interests. "Debts can compound just as effectively as investments - and if you have high interest debt, it can get out of control quickly because more interest is compounding on itself every month."

The article mentions three ways compound interest can work for you: Interest earned(ex: bonds), Time( the longer your money in invested the longer it can benefit from compounding, and Dollars invested(If the amount you have invested is limited, then the benefits of compounding will also be limited). And it also mentions three ways it can work against you: Having high-interest debt, Excess expenses, and Tapping into tax-deferred accounts.

2. How do lenders decide your APR?

I wanted to know more about the APR since the book only touched on it . DeMatteo informs us that your credit score has a lot to do with the percentage of APR you are given, and having a higher credit score can lower your APR (2020). The article points out that as the customer is searching for someone to loan them money, banks and loan companies are searching for reliable people to borrow money. The most common factors that help in determining your APR include, payment history, fixed or variable interest rate, loan term, if there's going to be a down payment and so on and so forth (DeMatteo, 2020). She notes that checking your credit score and FICO score before filling out a loan application can give you an idea on what your APR might be, based on how high or low a score you have (DeMatteo, 2020).

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