Money made easy: Compound interest, credit scores and inflation

*Collaborative Post

Money terminology gives a lot of people headaches. It can feel overwhelming and complicated, which means a lot of people don’t understand a lot of factors which can affect them directly.

Let’s take a look at compound interest, credit scores and inflation, and how they affect your bank balance.

Understanding compound interest

Before you can understand compound interest, you need to know what simple interest is. Simple interest is an amount added to the original balance or loan repayment plan. Compound interest is where interest is added to the current balance at regular intervals.

For example, if you had £100 in your savings account with an interest rate of 10%, you would initially earn £110. Next time interest is applied, it would be on the £110, making it £121.

Compound interest can be a great way to quickly grow your savings account without having to do very much!

Making sense of credit scores

Your credit score is a numerical indication of your ability to borrow and successfully repay credit. It is based on your credit history, which is made up of past loans, direct debits and other financial transactions.

A good credit score means you could qualify for better loans with lower interest rates. Your score may even be used by landlords to check that you will be able to pay rent reliably.

There are ways to improve your credit score. Registering to vote is probably the easiest, so make sure you are on the electoral roll correctly. You can also utilise credit cards to build your score. Make sure you research your options and choose one you can afford to repay.

How inflation affects your money

Inflation is something that is often in the news. It refers to the increase in the price of goods and services over time.

In the year up to July 2025, inflation in the UK rose to 3.8%. This means that everyday items such as bread cost, on average, 3.8% more. It also means that the money you have is worth less, making it harder to afford to live.

Using credit cards wisely

As mentioned, when credit cards are used responsibly, they can be an incredibly useful tool. The trick is knowing how to use them properly.

The first thing to remember is to pay it off in full every month. This prevents you from accruing any interest and paying back more than you borrowed. The only exception is if you have an interest-free term in your contract, but it is still a good idea to get into the habit of paying it off in full.

If you find you cannot repay the full amount, make sure you at least make the minimum payment. If you miss this, a mark will be made on your credit file, potentially hampering your borrowing prospects down the line. Set up a direct debit to ensure you never miss a payment.

*This is a collaborative post. For further information please refer to my disclosure page.