Explaining Accrued Interest, How It Works, When It Helps, and When It Hurts
Interest is one of the most powerful forces in personal finance—it can help you build wealth or trap you in a cycle of debt. If you’ve ever taken out a loan, invested in a savings account, or carried a credit card balance, you’ve encountered accrued interest—but you might not fully understand how it affects you.
Accrued interest is the running total of interest that builds up daily on loans, credit cards, and savings accounts. It’s the reason your debt can snowball if you don’t make payments and the reason your savings grow when left untouched.
In this guide, we’ll break down:
- What accrued interest is and how it works
- How it impacts your loans, credit cards, and investments
- Whether it’s good or bad for your finances
- How to avoid paying too much in accrued interest
Let’s dive into the double-edged sword of accrued interest.
What Is Accrued Interest?
Accrued interest is the accumulation of interest over time on an outstanding balance—whether that’s a loan, credit card, or investment.
If you borrow money, accrued interest adds to your debt until you make a payment. If you save or invest money, accrued interest adds to your earnings over time.
For example, imagine you have a $10,000 loan with a 5% annual interest rate.
- If interest accrues daily, you’ll owe a tiny amount more each day.
- If you don’t pay for a month, the total interest accrued is added to your balance.
- If it compounds, you’ll start paying interest on your interest.
Accrued interest doesn’t just appear on one type of account—it applies to credit cards, mortgages, student loans, savings accounts, and investments.
| Key Takeaway |
|---|
| Accrued interest is the ongoing buildup of interest on a balance, whether that’s debt (bad) or savings (good). |
How Does Accrued Interest Work?
Accrued interest is calculated based on a few key factors:
- Principal (the original loan or deposit amount)
- Interest rate (how much is charged or earned)
- Time period (how often interest accrues)
- Compounding frequency (how often interest is added to the balance)
Accrued Interest on Loans and Credit Cards (Costs You Money)
For loans and credit cards, interest accrues daily or monthly and adds to what you owe.
How Accrued Interest Increases Your Debt
Let’s say you have a $5,000 credit card balance with a 20% APR.
- Interest accrues daily at a rate of (20% ÷ 365) = 0.0548% per day.
- Each day you carry the balance, about $2.74 in interest is added.
- If you only make the minimum payment, interest keeps compounding—costing you thousands over time.
| Why This Matters |
|---|
| If you don’t pay off your balance in full, interest keeps accruing daily, making it harder to get out of debt. |
Accrued Interest on Savings and Investments (Earns You Money)
On the flip side, accrued interest is great when it works in your favor—like in a high-yield savings account, bonds, or investments.
How Accrued Interest Grows Your Money
Say you deposit $5,000 in a savings account earning 4% APY, compounded monthly.
- Each month, you accrue 0.33% interest.
- Over time, that interest is added to your balance, and the next month, you earn interest on both the original deposit AND the accrued interest.
Why does this matter? When interest accrues in savings or investments, it helps your money grow passively over time.
| Key Takeaway |
|---|
| Accrued interest on debt costs you money, while accrued interest on savings helps you build wealth. |
Is Accrued Interest Good or Bad?
Whether accrued interest is good or bad depends entirely on which side of the equation you’re on.
| Accrued Interest Is GOOD When… | Accrued Interest Is BAD When… |
|---|---|
| You earn it in a high-yield savings account. | It adds up on credit cards, student loans, and mortgages. |
| Your investments grow through compounding interest. | You carry a credit card balance or make only minimum payments. |
| You reinvest your earned interest to maximize gains. | Your debt balance keeps increasing due to daily accrued interest. |
The biggest mistake consumers make is not understanding how accrued interest works—especially when it comes to loans.
| Key Takeaway |
|---|
| Accrued interest is your best friend in savings and your worst enemy in debt. |
How to Avoid Paying Too Much in Accrued Interest
If you want to keep accrued interest from draining your finances, there are key strategies to follow.
Pay Off High-Interest Debt First
Credit cards and payday loans have insane interest rates (15%–400%). The longer you carry a balance, the more interest accrues daily.
| Strategy |
|---|
| Focus on paying off high-interest debt first to stop interest from piling up. |
Make More Than the Minimum Payment
Banks love it when you make the minimum payment because it maximizes the interest you owe over time.
| Strategy |
|---|
| Always pay more than the minimum to reduce how much interest accrues. |
Choose Low-Interest or No-Interest Loans
Some lenders offer 0% APR financing for a period of time—use this to your advantage.
| Strategy |
|---|
| If borrowing is necessary, look for low- or zero-interest promotions. |
Use High-Yield Savings and Compound Interest Accounts
To make accrued interest work for you, put your money into:
- High-yield savings accounts (HYSAs)
- Certificates of deposit (CDs)
- Treasury bonds or money market accounts
| Strategy |
|---|
| Let interest work in your favor by using accounts with compound growth. |
Make Accrued Interest Work for You, Not Against You
Accrued interest is a powerful financial force—and whether it helps or hurts you depends on how you use it. If you carry high-interest debt, accrued interest is your worst enemy, constantly adding to what you owe. But if you invest in the right savings accounts, accrued interest is your best friend, growing your wealth passively over time. Smart financial planning means keeping accrued interest under control on debt while maximizing it in savings.
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Citations
- Federal Reserve: How Interest Works in Banking
- Consumer Financial Protection Bureau: The Dangers of High-Interest Debt
- Bankrate: Best High-Yield Savings Accounts