Key Points to Remember

• APR and APY both revolve around interest but serve distinct purposes and convey different meanings.
• Annual Percentage Rate (APR) captures the total yearly cost of borrowing, encompassing interest plus some lender fees.
• Annual Percentage Yield (APY) reveals how much interest you accumulate over a year, usually linked to savings and deposit products.
• Compound interest factors into APYs, whereas APRs leave it out.

When sifting through credit card offers, the acronyms APR and APY often pop up, and although they appear alike, their functions couldn’t be more different. To put it simply, APR reflects the interest you owe, whereas APY highlights the interest you gain.

Below is an insightful breakdown to navigate APR and APY — what they mean, how they operate, and what sets them apart.

APR vs. APY: The Essentials

APR quantifies the interest cost on a debt, like a credit card or loan, while APY measures the interest income from accounts that generate earnings — think savings accounts, CDs, and money market accounts.

In other words, credit cards don’t have an APY, since they don’t pay you interest.

An Apple Card Note

For example, Apple Card holders can funnel their Daily Cash rewards into a High Yield Savings Account (HYSA) linked in the Wallet app. As of March 26, 2025, this HYSA offers an APY of 3.75%, though this figure may fluctuate over time and is subject to maximum balance limits detailed in the Deposit Account Agreement.

Another crucial distinction: APR skips over compounding interest, while APY embraces it.

APY incorporates your base interest plus the interest on that interest, compounding over time. APR, especially for installment loans, factors in interest and some fees but excludes compounding. For credit cards, however, APR and the stated interest rate are one and the same.

Breaking Down APR

When the term APR comes up, it’s all about transparency. Laws protect borrowers by mandating lenders to spell out APR upfront—this figure is designed to capture the true yearly cost of borrowing, rolling in lender fees and other charges beyond just the interest rate. Mortgage loans, for instance, may carry origination fees and points that get baked into the APR.

With credit cards, APR usually matches the interest rate. Additional costs—annual fees, late payment penalties, balance transfer fees—typically don’t make it into the APR because lenders can’t reliably predict if or when you’ll rack those up.

Keep in Mind: Credit cards come with some flavor of APR to watch for:

• Purchase APR — interest rate on buys you make
• Introductory APR — often a low or 0% rate for a limited period after opening your card
• Balance Transfer APR — interest on balances shifted from another card
• Cash Advance APR — fees and interest on cash withdrawals
• Penalty APR — a harsher rate triggered by missed payments

How Does APR Actually Work?

At its core, APR on credit cards is a straightforward yearly interest rate slapped onto what you borrow. Say you snag a $1,000 laptop with a 20% APR card—you’d owe $200 in interest after a year if the balance stayed untouched. But, reality bites: your actual interest bill often ends up bigger since APR doesn’t capture daily compounding.

Credit card issuers commonly compound interest daily, meaning each day’s average balance racks up new interest, which piles onto your principal and then itself earns interest — interest on interest. The bigger your outstanding balance grows, the steeper the charges escalate. On the flip side, whittle down your balance and you help keep interest fees in check.

Good news: You can dodge interest charges by clearing your statement balance every month before the due date. Another tactic is leveraging a 0% introductory APR offer for big purchases, helping you buy time interest-free—though be mindful of balance transfer fees that often come attached.

Unpacking APY

While APR is your annual borrowing hit, APY flips the script: it reveals how much you’ll pocket from interest earned in a year. Also called the Effective Annual Rate (EAR), APY is the go-to for banks and investors wanting to state the real return on your savings or deposits. Here, you’re the lender, and APY lets you peek at your earnings growth.

Unlike APR, APY folds compounding interest into the calculation. However, it excludes fees—which might be a strategic omission since factoring fees in would shrink the headline rate and potentially scare off depositors.

How APY Gets Calculated

APY considers how frequently your money compounds interest using this formula:

APY = (1 + r/n)n – 1

Here, r stands for the stated annual interest rate, and n is the number of compound periods per year.

More frequent compounding accelerates growth — daily beats monthly, monthly beats quarterly, and so on — because interest earned each cycle adds to the principal, and the next interest calculations build on that bigger base.

When sizing up savings or investment accounts, focusing on APY over the nominal interest rate makes sense. A seemingly higher rate with infrequent compounding might lag behind an account with a slightly lower rate but faster compounding cadence.

Why Knowing APR and APY Matters

Whether you’re hunting for the perfect credit card or setting up a stash in a savings account, grasping APR and APY equips you to make smarter money moves.

For credit cards, eyeball the APR carefully—lower rates generally translate to less interest, but remember, extra fees like annual charges could tip the scales. Always read the fine print to see if fees chew up your gains.

For savings, a higher APY means your cash grows faster. Don’t forget to check how often interest compounds, since that frequency can significantly boost your earnings over time.

Quick Stats Snapshot

According to recent data, average credit card APRs hover around 16-24%, but high-risk borrowers may see rates north of 25%. Meanwhile, savings account APYs vary massively—from a measly 0.01% in traditional accounts to 4% or higher in high-yield accounts during strong economic periods driven by Federal Reserve rate hikes.

Common Questions About APR and APY

What Constitutes a Good Credit Card APR?

A “good” APR is relative; typically, anything below the current prime rate plus a reasonable margin qualifies. For many, an APR under 25% is acceptable, especially if it comes with useful perks like rewards. Keep in mind, what was a bargain rate a few years ago may seem steep today.

What’s a Strong APY?

Good APYs depend on account type and economic backdrop. Ordinary savings accounts might offer just 0.01%, while high-yield accounts can boast 4% or more. Your relationship with your bank and balance size can also nudge your APY up or down. Generally, APYs climb when the Fed lifts interest rates and retreat when cuts happen.

How Often Do APRs and APYs Shift?

Variable-rate APRs and APYs can fluctuate often, sometimes daily, reacting to the economic climate. Factors like Federal Reserve decisions, inflation trends, and market conditions mainly steer these changes.