APR vs APY: what's the difference and which number should I compare?

Concerns & risks

You are comparing a credit card, a loan or a savings account and the advertised rates use different terms, so you can't tell which offer is actually better.

Causes & evidence

APR, the annual percentage rate, expresses the yearly cost of borrowing, and for many loans it includes certain fees on top of the interest rate. APY, the annual percentage yield, shows what you earn on deposits in a year once compounding is included, which is why the CFPB notes that banks must disclose APY for savings accounts. Credit card APR can be fixed or variable; a variable APR moves with an index, often the prime rate. Because compounding raises the effective number, APY on a deposit is always at least as high as the simple interest rate.

Many credit cards have variable APRs tied to the prime rate, so the rate can change. On deposits, the APY reflects compounding frequency; daily compounding gives a slightly higher APY than monthly at the same rate.

Comparing a loan's interest rate with another loan's APR makes the first offer look cheaper than it really is.

What to do

1. For borrowing, compare APR across offers with the same term length.
2. For saving, compare APY across accounts with similar access and insurance.
3. Check whether a card's APR is fixed or variable and what index it follows.
4. Read the fee schedule, since some fees aren't captured in the headline number.
5. For cards, remember that paying the full statement balance avoids purchase interest in most cases.

Common mistakes:

• Comparing a loan's interest rate to another loan's APR
• Choosing a card by rewards while ignoring a high APR
• Chasing a promotional APY that drops after a few months

ReportSpeedMan tip: If you carry a credit card balance, the APR matters far more than rewards. If you pay in full every month, the APR barely touches you.

What I would actually do

for any card or loan I'd put the APRs side by side for the same term; for savings I'd line up APYs for insured accounts with the access I need.

The trade-off people miss: rewards and promo rates grab attention, but a variable APR on a balance you carry costs more than most rewards return.

How you can tell it worked

You can compare two offers in under a minute by lining up APR or APY for like products.

Quick FAQ

Is a lower APR always better?
For the same term and fees, yes.

Why does APY exceed the rate?
Compounding adds interest on interest.

Does APR matter if I pay in full?
Usually little for purchases, but check cash advance terms.

Wrap-up: Use APR to compare what borrowing costs and APY to compare what saving earns. Match like with like and the better offer becomes obvious.

Wiki: Compound Interest.

APR vs APY: official sources I checked

• CFPB: Fixed vs variable APR
• CFPB: Credit cards