APR vs. APY: Why the Same Rate Can Mean Two Different Numbers
APR ignores compounding; APY includes it. Lenders tend to quote the first and banks the second. Here is how to convert between them and why the gap matters on high-rate debt.
A savings account advertises its rate one way. A credit card advertises its rate another way. The difference is not cosmetic, and it tends to work in the institution's favor each time.
APR (annual percentage rate) is a simple annual rate that does not include the effect of compounding. APY (annual percentage yield) includes compounding, so it shows what you actually earn or pay over a year.
The conversion
If interest compounds n times a year:
A 12% APR compounded monthly:
The 0.68 percentage points come from interest earning interest within the year.
| APR | APY, monthly compounding | APY, daily compounding |
|---|---|---|
| 5% | 5.12% | 5.13% |
| 12% | 12.68% | 12.75% |
| 24% | 26.82% | 27.11% |
Show the numbers behind this chart
| APR | APY | |
|---|---|---|
| 5% APR | 5.0% | 5.1% |
| 12% APR | 12.0% | 12.7% |
| 24% APR | 24.0% | 26.8% |
Why the gap widens at higher rates
Compounding matters more when each period's interest is larger. At 5%, the difference is about a tenth of a point. At 24%, it is almost three points. On high-rate credit card debt, the effective annual cost of carrying a balance is noticeably higher than the APR printed on the statement.
Who quotes what
- Savings accounts and CDs usually advertise APY, the larger of the two numbers.
- Credit cards and loans usually advertise APR, the smaller one.
U.S. rules require deposit accounts to disclose APY and lending products to disclose APR, so this pattern is built into the system. Just compare like with like: APY against APY, APR against APR.
A wrinkle: APR on loans can include fees
For mortgages and many installment loans, the disclosed APR includes certain fees and costs in addition to the interest rate, so it can be higher than the "note rate." That makes APR useful for comparing total borrowing costs between loan offers, but it means "APR" on a mortgage and "APR" on a credit card are not measuring exactly the same thing.
How credit cards actually charge
Most cards divide the APR by 365 to get a daily periodic rate, apply it to your average daily balance, and add the interest to your balance monthly. If you pay the full statement balance by the due date each month, a grace period usually means you pay no interest on purchases at all. The APR only matters when you carry a balance.
The takeaway
APY tells you what actually happens over a year. When comparing savings, use APY. When comparing debts, convert APR to an effective rate if the gap matters, which it does at credit card rates. And for loans, remember that APR can include fees, which is useful for comparing offers.
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