APR vs APY

Frequently asked questions

What's the actual difference between APR and APY?

APR (annual percentage rate) is a simple annualized rate — it doesn't account for compounding within the year. APY (annual percentage yield) does: it's the rate you actually earn or pay once interest that's added partway through the year starts earning or costing interest itself. A 20% APR compounded daily works out to an APY of 22.13% — a full 2.13% higher than the APR alone suggests.

Why does a credit card show APR instead of APY?

Because APR is the smaller-looking number. Credit card issuers are required to disclose APR, and since compounding usually happens daily on unpaid balances, the APY you actually pay is always higher than the quoted APR — often by a percentage point or more on typical rates.

Why does a savings account show APY instead of APR?

Same logic, opposite direction: APY is the bigger-looking number for a rate you're earning, so banks advertise APY on savings accounts and CDs. A 5% APR compounded monthly is actually 5.12% APY — small on paper, but it's the number that determines your real year-end balance, not the APR.

Which one should I compare when shopping for a rate?

Always compare the same rate type on both sides — comparing one offer's APR to another's APY isn't a fair comparison, since APY is inherently the higher number for identical terms. If you only have an APR and a compounding frequency, convert it to APY first: even at a low 1.00% APR, monthly compounding brings it to 1.00% APY, a small but real gap that grows fast at higher rates.