Which term describes interest charges that are calculated not only on the unpaid balance, but also on any accumulated interest not repaid?

• A. Annual Fee
• B. Credit Card Debt
• C. Compound Interest
• D. Cash Advance

Answer: (C)

This tests understanding of how interest can grow when it’s charged on both the principal and any previously earned interest. This mechanism is called compound interest. Because each period’s interest adds to the balance, the next period’s interest is calculated on a larger amount, so the total debt grows faster than if interest were charged only on the original principal. For example, with a 10% rate, an initial $100 balance would yield $10 in the first period; with compounding, the next period’s interest is based on $110, not just $100, so you earn $11 that period and the balance grows more quickly.

The other terms don’t describe this process. An annual fee is a fixed charge charged regardless of balance growth. Credit card debt refers to the amount you owe, not how interest is calculated. A cash advance is a transaction type that may incur higher costs, but it isn’t the term for interest-on-interest.