While most consumers know that APR stands for "Annual Percentage Rate" and APY stands for "Annual Percentage Yield," there is still confusion pertaining to what these are used for. When applied to loans and savings accounts, APRs are interest rates that require you to pay extra money, and APYs indicate a rate of return that makes you extra money, respectively. We break it down below:
An APR is the yearly interest rate you will pay if you carry a balance on your credit card, student loan, mortgage, etc. Since many of our readers come to the site to read our thorough credit card reviews, I will now discuss how APRs work for credit cards:
- One credit card may have a few different APRs. There may be one percentage rate for purchases, a different rate for balance transfers and another for cash advances.
- A credit card may offer a different APR for a user with average credit than for a user with a good or excellent credit history. Those with better credit histories are generally considered more creditworthy and qualify for a lower APR. These APR ranges are displayed as "x% – y% APR" in the card information and Terms and Conditions.
- Many credit cards offer an introductory APR, like a 0% APR for the first few months. If you get a card with a 0% introductory APR, you won't be paying any interest on your balance during the intro period. Keep in mind that this introductory APR will generally go up after the introductory rate expires.
- Consumers with good/excellent credit can usually qualify for these low introductory rates.
- There are "fixed" rate APRs that rarely change in credit cards, as well as "variable" rate APRs that change more often.
- Credit card companies are required to notify you if your fixed rate APR changes; however, they are not required to do so with a "variable" rate card, so you should always be paying attention to your interest rate.
- Learn more about credit cards and try our free credit card chooser to see which card is best for you.
On the other hand, APYs are much simpler to understand. An APY is the rate at which you will earn money on the balance in your savings account over the course of a year. Here's the lowdown on APYs and savings accounts:
- The higher your APY, the more money you will earn on the money you've put in your savings account.
- Different accounts pay interest in different ways. For example, with the American Express online savings account interest is compounded daily and credited monthly, while the Capital One 360 account compounds interest monthly and credits monthly as well.
- Some accounts offer higher APYs for people with higher balances, like the Everbank savings account which has an introductory APY of 1.25% for 6 months, and 1.01% thereafter, but your balance must be at least $5,000 in order to dodge their monthly fees.
- Online savings accounts offer higher APYs than regular banks because they don't need to spend as much money on employees and branches.
- Most of the top ranked online savings accounts also offer zero fees and no minimum balance requirements.
- Compare all of the top online savings accounts here and try the free online savings account calculator to see which savings account will make you the most money.