What is APY?
APY (Annual Percentage Yield) measures the interest you could earn over the course of a year. APY is expressed as a percentage based on the compound interest you earn on the principal dollar amount in your account. This typically applies to savings accounts, certificates of deposit, and money market accounts.
How APY is calculated:
APY = (1 + Periodic Rate)Number of periods – 1
$3,000 in a savings account that earns 1.00% APY* and compounds monthly = $30.14 yearly interest earned.
What is APR?
APR (Annual Percentage Rate) measures the rate the lender will charge you over the course of a year. APR is expressed as a percentage. This typically applies to credit cards, mortgages, personal and car loans.
How APR is calculated:
APR = Periodic Rate x Number of Periods in a Year
$3,000 credit card balance that charges 12% APR⁑ = $188 yearly interest paid ($15.66 monthly interest paid).
How One’s APY and APR compares to other banking services
APY and APR are two of the most important and foundational concepts to learn on your financial journey. The best tip is to shop around and compare rates. Knowing how frequently the interest compounds for APY and knowing if your interest rate is fixed or variable can help you save or earn thousands over the course of your financial relationship. Low advertised rates can be based on a number of hidden factors buried in fine print that are only accessible to people who have great to excellent credit scores.