April Vs APY: Understanding Credit Card Interest Rates

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When comparing credit cards, you may come across the terms APY and APR. Although these acronyms sound similar, they are very different in how they describe interest. For starters, Annual Percentage Rate (APR) refers to interest owed while Annual Percentage Yield (APY) shows interest earned.

Here is a guide to APR and APY, how they work and how they are different.

What is APR?

April refers to the amount of interest you will have to pay each year on a loan or credit card. This does not mean that you are going to pay your credit card or loan once a year usually you are making a monthly payment.

the Truth in Lending Act, which protects consumers from abusive lending practices, requires lenders to disclose the APR advance Indeed, APR is supposed to show the true annual cost of borrowing money, which includes lender fees and d other charges, in addition to interest rates. For example, mortgages often come with origination fees, points and other fees that the APR estimates.

But, when it comes to credit cards, the APR and the interest rate are the same. Although your card may come with annual fees or late payment fees, balance transfers, etc., card issuers generally do not include these fees in the APR. It’s just too difficult for credit card companies to predict what charges you’ll incur or how often you’ll incur them.

How does April work?

As mentioned earlier, APR is simple rate of interest to a borrower over one year. So if you buy a laptop for $1,000 using a credit card with an APR of 20 percent, 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 probably pay more because APR doesn’t show the compound interest effect. Most credit card issuers charge daily interest if your account has a balance. The issuer calculates your daily interest rate by dividing your APR by 365.

This means that interest is added to your account each day based on its average daily balance. The more your balance increases, 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 on credit card purchases altogether by paying your account balance in full each month by the due date. Another way to get around interest charges is to transfer your debt to a balance transfer credit card with a 0 percent APR for a specified period. Also, a credit card with a 0 percent introductory APR may be worth considering if you have larger purchases in mind and want to avoid interest while you pay.

What is APY?

While APR is used to describe the interest you will pay on loans and credit cards, APY refers to the interest you will earn on your savings over a year. The term APY—often called Annual Earned Rate or EAR—is commonly used by banks and investors to indicate 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 does not include fees because that would weigh on the rate of return, making it more difficult 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 periods in each year.

But, if you don’t want to run the calculation yourself, a compound interest calculator could save you some time.

A savings account or a deposit account can be compounded daily, monthly, quarterly or annually. Generally, the more often your account adds compound interest, the more your investment grows. This is because each time your account compounds interest, the interest earned is added to the principal amount and future interest payments are calculated on the larger principal balance.

If you are comparing savings or investment accounts, it literally pays to compare their APYs and not just their interest rates. It may seem that one account is a better investment because its interest rate is higher than another account. However, if this second account compounds more often, it may exceed the first account over the year.

April vs. APY

APR and APY are both of measurement 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 interest-bearing deposit account, such as a savings account, CD or money market account.

The most important difference between APR and APY is that APR does not take compound interest into account, while APY does. APY refers to the interest on your deposit as well as compound interest. In contrast, the APR value for installment loans only includes interest plus potential fees. There is no difference between APR and credit card interest rate.

The bottom line

Whether you’re comparing credit card offers or establishing a savings account, having a good understanding of APR and APY can help you make more informed decisions with your money. And if you need help, Bankrate has plenty of credit card calculators to help you out.

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 the APR credit card, so be sure to read the fine print to determine if the charges are likely to offset the card’s benefits.

The opposite is true with APY. The higher the rate, the more interest you will earn on your deposit. And if you’re comparing savings accounts, pay close attention to how often your interest compounds to better understand how much your money will earn.

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