Key takeaways
- Each APR and APY consult with rates of interest however the phrases have totally different meanings and makes use of.
- An annual share charge (APR) measures the precise quantity it prices to borrow cash yearly, which generally contains the rate of interest plus sure lender charges.
- An annual share yield (APY) measures the quantity of curiosity earned over a 12 months and is often used with financial savings and different deposit accounts.
- Compounding curiosity is taken into account with APYs however not with APRs.
When evaluating bank cards, it’s possible you’ll encounter the phrases APY and APR. Whereas these acronyms look comparable, they’re very totally different in the best way they describe curiosity. For starters, annual share charge (APR) refers to curiosity owed whereas annual share yield (APY) exhibits curiosity earned.
Right here’s a information on APR and APY, how they work and the way they’re totally different.
APR vs. APY
APR describes the curiosity you owe on a bank card or mortgage, whereas APY measures the curiosity you earn from an interest-earning deposit account, similar to a financial savings account, CD or cash market account.
In a way, then, there’s no such factor as a “bank card APY” since bank cards don’t earn curiosity.
Because the identify makes clear, money again bank cards earn money again, however these rewards charges are typically a lot larger than APY and infrequently solely apply to sure purchases. Bank card money again additionally received’t earn curiosity by itself except it’s deposited into an interest-earning account. And, in fact, any steadiness you owe in your card will solely be topic to curiosity prices (in spite of everything, you possibly can’t earn curiosity on cash you owe!).
That mentioned, some bank cards assist you to deposit your money again straight right into a high-yield financial savings account (HYSA) that’s solely obtainable to cardholders. On this case, you’d wish to have a look at each APR and APY when weighing the professionals and cons of making use of for a selected card.
For instance, the Apple Card* means that you can ship your Each day Money to a HYSA solely obtainable to cardholders and their approved customers. Apple bundles each of those accounts — the place your Each day Money is collected and your Apple HYSA — into the identical Pockets app in your comfort. As of March 26, 2025, the Apple HYSA boasts an APY of three.75 p.c, however that charge might change any time, together with after your account is opened. Most steadiness limits additionally apply, and you must see the Deposit Account Settlement for extra info relating to steadiness limits.
One other key distinction between APR and APY is that APR doesn’t take compounded curiosity into consideration, whereas APY does.
APY refers to your deposit’s curiosity plus compound curiosity, whereas the APR worth for installment loans solely contains the curiosity plus potential charges. There isn’t any distinction between the APR and the rate of interest for bank cards.
What’s an APR?
When most individuals see the time period APR, they normally take into consideration the overall quantity of curiosity that will likely be paid every year on a mortgage or bank card. Though curiosity is a part of an APR, that isn’t all the time the entire story.
The Fact in Lending Act, which protects customers in opposition to unfair lending practices, requires lenders to reveal the APR upfront. That’s as a result of APR is supposed to point out the precise annual price of borrowing cash, which incorporates lender charges and different prices along with the rates of interest. For instance, mortgage loans typically include origination charges, factors and different prices that the APR considers.
In terms of bank cards, nevertheless, the APR and the rate of interest are the identical. Whereas your card could include an annual payment or prices for late funds, steadiness transfers and the like, card issuers typically don’t embody these charges within the bank card APR. It’s just too troublesome for issuers to foretell which charges you’ll incur or how typically you’ll incur them.
How does an APR work?
As talked about, on the subject of bank cards, an APR is the easy rate of interest charged to a borrower over a 12 months. So, if you buy a $1,000 laptop computer laptop utilizing a bank card with a 20 p.c APR, your account steadiness will likely be $1,000, and also you’ll be charged $200 in curiosity over 12 months. Nevertheless, you’ll probably find yourself paying extra as a result of APR doesn’t present the impact of compounding curiosity.
Most bank card issuers compound the curiosity prices day by day in case your account carries a steadiness. Which means curiosity is added to your account day by day based mostly on its common day by day steadiness. The larger your steadiness grows, the extra curiosity is added to your steadiness every day. This additionally implies that you find yourself paying curiosity on curiosity. Conversely, the extra your steadiness decreases, the much less curiosity is added to your steadiness.
Happily, you possibly can normally keep away from paying curiosity on bank card purchases by paying your account steadiness in full by the due date every month. If you wish to keep away from curiosity whereas paying off a big buy, a bank card with a 0 p.c introductory APR could also be price contemplating. Transferring present debt to a steadiness switch bank card with a 0 p.c introductory APR is one other solution to keep away from paying curiosity for a time period, although you’ll normally be answerable for a steadiness switch payment.
What’s an APY?
Whereas APR is used to explain the quantity of curiosity you’ll pay yearly, APY refers back to the quantity of curiosity you’ll earn over a 12 months. Generally known as an earned annual charge (or EAR), an APY is often utilized by banks and buyers to state the overall charge of return you’ll obtain on financial savings and deposit accounts. On this case, you’re the “lender” and the APY lets you understand how a lot curiosity your cash is incomes.
In contrast to APR, APY takes compound curiosity into consideration. Nevertheless, APY doesn’t embody any charges. One cause this can be is that doing so would drag down the return charge, making it tougher for banks and monetary establishments to draw extra buyers.
How does an APY work?
APY considers how typically your financial savings or funding account compounds with this method:
Bankrate perception
APY= (1 + r/n )n – 1
The “r” refers back to the said annual rate of interest, and “n” is the variety of compounding intervals every year.
When you don’t wish to run the mathematics your self, Bankrate’s compound curiosity calculator might prevent time.
A financial savings account or deposit account could compound day by day, month-to-month, quarterly or yearly. As a rule, the extra typically your account provides compound curiosity, the quicker your funding grows. That’s as a result of every time your account compounds curiosity, the earned curiosity is added to the principal quantity, and future curiosity funds are calculated on the bigger principal steadiness.
When you’re evaluating financial savings or funding accounts, it pays to check their APYs and never simply their rates of interest. At first look, it might seem that one account is a greater funding as a result of its rate of interest is larger than one other account. Nevertheless, if the second account compounds extra regularly, it might outgrow the primary account over the 12 months.
The underside line
Whether or not you’re evaluating bank card presents or establishing a financial savings account, having a agency understanding of APR and APY can assist you make extra knowledgeable choices along with your cash. When you need assistance, Bankrate has many bank card calculators to help you.
When contemplating a bank card provide, take note of the cardboard’s APR. Though a decrease charge means you’ll pay much less curiosity, keep in mind that annual charges and different prices are usually not included in a bank card’s APR. Be sure to learn the effective print so you possibly can decide if charges are more likely to offset the cardboard’s advantages.
The other is true with APY. The upper the speed, the extra curiosity you’ll earn in your deposit. When you’re evaluating financial savings accounts, pay shut consideration to the frequency that your curiosity compounds to raised perceive how a lot your cash will earn.
*The details about the Apple Card has been collected independently by Bankrate.com. The cardboard particulars haven’t been reviewed or permitted by the cardboard issuer.
