Cumulative Interest Definition

When you place money into a savings account, the money you actually deposit is called the principal. At the end of the month, the bank will pay a small amount of interest on the principal. The next month, the bank will pay a small amount of interest on the principal combined with the previous month’s interest. After many months, the savings account will have grown-the difference between the current balance and the principal is the cumulative interest. It works the same way on credit card, too, except that cumulative interest on debt isn’t as much fun as cumulative interest on a savings account. If you charge $150 on a credit card, and five months later you owe $175-after paying $10 each month-you’re looking at $75 worth of cumulative interest combined with the remaining $100 of the principal.