APR Vs APY Understanding Credit Card Interest Rates

APR Vs APY Understanding Credit Card Interest Rates

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Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. SHARE: Cavan Images/Getty Images February 08, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Tim is a freelance personal finance writer and blogger with a particular focus on credit cards and consumer lending. In 2002, he stumbled upon a copy of "The Millionaire Next Door," by Thomas J. Stanley and William D. Danko, which ignited a passion for learning and sharing fact-based money principles. Tim has a passion for demystifying personal finance and helping people live their best lives. Bankrate logo

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At Bankrate, we have a mission to demystify the credit cards industry — regardless or where you are in your journey — and make it one you can navigate with confidence. Our team is full of a diverse range of experts from credit card pros to data analysts and, most importantly, people who shop for credit cards just like you. With this combination of expertise and perspectives, we keep close tabs on the credit card industry year-round to: Meet you wherever you are in your credit card journey to guide your information search and help you understand your options. Consistently provide up-to-date, reliable market information so you're well-equipped to make confident decisions. Reduce industry jargon so you get the clearest form of information possible, so you can make the right decision for you. At Bankrate, we focus on the points consumers care about most: rewards, welcome offers and bonuses, APR, and overall customer experience. Any issuers discussed on our site are vetted based on the value they provide to consumers at each of these levels. At each step of the way, we fact-check ourselves to prioritize accuracy so we can continue to be here for your every next. Bankrate logo

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What is APR

refers to the amount of interest you’ll pay annually on a loan or credit card. That doesn’t mean you’ll pay your credit card or loan once per year—typically, you’ll make a monthly payment. The , which protects consumers against unfair lending practices, requires lenders to disclose the APR upfront. That’s because APR is meant to show the actual annual cost of borrowing money, which includes lender fees and other charges in addition to the interest rates. For example, mortgage loans often come with origination fees, points and other charges that the APR considers. But, when it comes to credit cards, the APR and the interest rate are the same. While your card may come with an annual fee or charges for late payments, balance transfers, and the like, card issuers generally don’t include these fees in the APR. It’s simply too difficult for credit card companies to predict which fees you will incur or how often you will incur them.

How does APR work

As mentioned, APR is the simple interest rate charged to a borrower over a year. So, if you purchase a $1,000 laptop computer using a credit card with a 20 percent APR, your account balance will be $1,000, and you’ll be charged $200 in interest in 12 months, which equals $16.66 per month. However, you’ll likely end up paying more because APR doesn’t show the effect of compounding interest. Most credit card issuers compound the interest charges daily if your account carries a balance. The issuer calculates your daily interest rate by dividing your APR by 365. That means interest is added to your account every day based on its average daily balance. The greater your balance grows, the more interest is added to your balance each day. Conversely, the more your balance decreases, the less interest is added to your balance. Fortunately, you can usually avoid paying interest altogether on credit card purchases by paying your account balance in full each month by the due date. Another way to bypass interest charges is to transfer your debt to a with a 0 percent APR for a specified period. Further, a may be worth considering if you have larger purchases in mind and want to avoid interest while you pay it off.

What is APY

While APR is used to describe the interest you’ll pay on loans and credit cards, refers to the interest you’ll earn on your savings over a year. The term APY—often referred to as earned annual rate or EAR—is commonly used by banks and investors to state your rate of return on savings and deposit accounts. In this case, you are the “lender” and the APY lets you know how much your money is earning in interest. Unlike APR, APY takes compound interest into account. However, APY doesn’t include any fees because that would drag down the return rate, making it harder for banks and financial institutions to attract more investors.

How does APY work

APY considers how often your savings or investment account compounds with this formula: APY= (1 + r/n )n – 1. “R” refers to the stated annual interest rate, and “n” is the number of compounding periods each year. But, if you don’t want to run the math yourself, a could save you time. A savings account or deposit account may compound daily, monthly, quarterly or annually. As a rule, the more often your account adds compound interest, the faster your investment grows. That’s because each time your account compounds interest, the earned interest is added to the principal amount, and future interest payments are calculated on the larger principal balance. If you’re comparing savings or investment accounts, it pays—quite literally—to compare their APYs and not just their interest rates. It may appear that one account is a better investment because its interest rate is higher than another account. However, if that second account compounds more frequently, it may outgrow the first account over the year.

APR vs APY

APR and APY both measure interest, but they have different uses. APR describes the interest you owe on a credit card or loan, while APY measures the interest you earn from a savings or an interest-earning deposit account, such as a savings account, CD or money market account. The most significant difference between APR and APY is that APR doesn’t take compounded interest into account, while APY does. APY refers to your deposit’s interest plus compound interest. By contrast, the APR value for installment loans only includes the interest plus potential fees. There is no difference between the APR and the interest rate for credit cards.

The bottom line

Whether you’re comparing credit card offers or establishing a savings account, having a firm understanding of APR and APY can help you make more informed decisions with your money. And if you need help, Bankrate has many to assist you. If you’re considering a credit card offer, pay attention to the APR—a lower rate means you’ll pay less interest. Remember, annual fees and other charges are not included in credit card APRs, so make sure to read the fine print to determine if fees are likely to offset the card’s benefits. The opposite is true with APY. The higher the rate, the more interest you’ll earn on your deposit. And if you’re comparing savings accounts, pay close attention to the frequency that your interest compounds to better understand how much your money will earn. SHARE: Tim is a freelance personal finance writer and blogger with a particular focus on credit cards and consumer lending. In 2002, he stumbled upon a copy of "The Millionaire Next Door," by Thomas J. Stanley and William D. Danko, which ignited a passion for learning and sharing fact-based money principles. Tim has a passion for demystifying personal finance and helping people live their best lives.

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