Two rates show up everywhere in personal finance. APR is the yearly rate before compounding. APY includes compounding. Lenders like to quote APR; banks like to quote APY on savings. Knowing the difference keeps comparisons honest.
1. The conversion
With monthly compounding, APY = (1 + APR / 12) to the power of 12, minus 1.
| APR | Monthly rate | Daily rate | Effective yearly (APY) |
|---|---|---|---|
| 5% | 0.42% | 0.0137% | 5.12% |
| 10% | 0.83% | 0.0274% | 10.47% |
| 18% | 1.50% | 0.0493% | 19.56% |
| 24% | 2.00% | 0.0658% | 26.82% |
| 30% | 2.50% | 0.0822% | 34.49% |
2. What it means on a card balance
A $5,000 balance at 24% APR costs about $100 in interest in a month (5,000 x 0.24 / 12). Carried for a year with no payments, compounding takes the cost past what the "24%" suggests.
3. Compare like with like
- Loans and cards: compare APR with APR. For loans, APR also folds in some fees, so it's a better comparison than the bare interest rate.
- Savings: compare APY with APY. A 4.5% APY account beats a 4.45% APR account only slightly, but mixing the two labels can mislead.
4. Daily interest on cards
Most cards charge interest daily on the average daily balance. Paying part of the balance early in the cycle, not just on the due date, lowers the interest a little.
5. The practical takeaway
For debt, the number to watch is the dollars of interest per month. For savings, it's the APY after any conditions (minimum balance, monthly deposit) are met.
Free tools
- Interest rate calculator: https://smartbudgetsheets.surge.sh/calculators/interest-rate-calculator/?utm_source=mataroa
- APY calculator: https://smartbudgetsheets.surge.sh/calculators/apy-calculator/?utm_source=mataroa
- Credit card interest calculator: https://smartbudgetsheets.surge.sh/calculators/credit-card-interest-calculator/?utm_source=mataroa
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=mataroa
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=mataroa
General information, not financial advice. Figures are rounded examples.