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Starting back with the release of the iPhone 3GS, Apple included a built-in digital compass in its iPhones. This compass is what allows the iPhone to, among other things, show you which way you're currently facing in the Maps app. But it also powers the included Compass app. When you first open the compass, you may see this message telling you to calibrate it. Just rotate your phone in circles to move this little red ball. Once the device is calibrated you'll see the compass. And as you can see, the compass is designed to look and act like a real compass. And it acts like a real compass because it is a real compass running of a real magnetometer.
So as I rotate the iPhone around, the compass continues to point North. While also displaying my heading as well as my current longitude and latitude position. Now if you're familiar with using compasses you know there's a difference between true north and magnetic north. Magnetic north is where traditional compasses point towards which happens to be about 11 degrees shy of true north which is where the most northern point of the Earth's axis lies. The compass up uses magnetic north by default. If you need to switch it to true north, go to Settings >Compass, and turn on Use True North.
Really though, I doubt most iPhone users are using the Compass app for much other than showing off this feature on their phone. I don't know many people who even know how to navigate with a compass anymore. If you do know how to use a compass, this can be an incredibly useful app to have. What you'll probably find much more useful is the new feature of the compass in iOS 7. Just swipe to the left to reveal a built in level tool. Some people refer to this as a spirit level. This allows you to place the straight edge of your iPhone down on a surface to find out whether it's level to the ground. I've used this many times for hanging picture frames. When the surface is level, the spirit level turns green.
You can also place your phone flat on its back to test how level a flat surface, like a tabletop is. The closer the two white circles come to each other, the closer the surface is to level. You'll again see a green screen and a zero degrees indicator when the surface is completely level. Additionally you can tap the screen to lock in a comparison point. This can be useful if you want to get a precise angle between two lines on an unlevel surface. Just tap the screen to set the new zero degree point, then rotate the phone until you get the angle you need. Tap the screen again to unlock the comparison point. Okay, so that's the compass app, which now includes a spirit level, here in iOS 7.
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