What "interest capitalization" actually means
When you put money into a savings account or a term deposit, the bank pays you for letting it use that money for a while. This payment is called interest. Interest is calculated as a percentage of the amount sitting in your account, measured over a year. That percentage is the interest rate.
Capitalization of interest is the moment when the bank adds the interest it has calculated to your balance. From that point on, that interest becomes part of your capital (the money you originally put in), and it starts earning interest of its own. This is what people mean by compound interest: interest earned on interest.
Why the frequency of capitalization matters
A bank can add interest to your balance at different intervals: once a year, once a month, or sometimes even once a day. The more often this happens, the sooner your interest starts earning more interest on its own.
At first glance the difference looks small, but over a longer saving period it becomes noticeable. Two products with the same annual interest rate, but a different capitalization frequency, do not actually pay out the same amount at the end. The one that adds interest more often usually ends up paying a little more.
That is why it is worth checking not just the interest rate itself, but also how often capitalization happens. You can usually find this detail in the product's terms and conditions, or in its description inside the bank's app.
Term deposits vs. savings accounts: a different rhythm
On a savings account, the interest rate can change over time, and interest is usually added every month. On a term deposit, the rate is usually fixed for the whole period, and interest is typically added just once, at the end of that period (or monthly, if it is a deposit with monthly capitalization).
If you are looking for somewhere to put your savings, a list of current deposits can show you how different providers describe their terms, including exactly how often capitalization happens.
A simple worked example
Let's say you deposit 10,000 PLN for one year, at an interest rate of 5% per year.
Option 1: capitalization once a year, a single addition at the end of the year. Interest is calculated on the full 10,000 PLN at 5%, which comes to 500 PLN. After a year, your balance is 10,500 PLN.
Option 2: capitalization every month. Each month, the bank adds a portion of the interest (roughly 5% divided by 12, to simplify), and from the next month onward, interest is calculated on the new, slightly higher balance. After a year, the balance comes to roughly 10,512 PLN, about 12 PLN more than with yearly capitalization.
A difference of 12 PLN on 10,000 PLN over one year is small. But that gap grows when the amount is larger, or when you save over many years, because with every period, "interest on interest" is calculated on an ever higher base.