A method of calculating interest where you earn a percentage not just of the principal amount but the principal plus any previously earned interest.
For example, say you have a balance of $1,000 and are earning an annual interest rate of 6%. At the end of the first year, you'll earn $60 in interest. The following year you'll earn your 6% interest on the total new balance of $1,060. At the end of the second year, you'll have a total of $1,123.60.