APR vs APY: Here's the Difference and Why It Matters

Many people use APR and APY interchangeably, but they are two different things. APR is the interest you pay when you borrow money, and APY is the interest you earn when you save or invest money.

Understanding the difference can help you make smarter financial decisions moving forward. Here’s everything you need to know about APR vs APY.

APR vs. APY

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What Is APR?

APR, or annual percentage rate, measures the interest and some fees you pay when you borrow money. It applies to most loans including mortgages, car loans and credit cards.

If you’re looking to take out a loan or a mortgage, you’ll want to compare the APR from each lender. Some people get APR and interest rates confused, let’s take a quick look at the difference between the two.

APR vs Interest Rate

The interest rate on a loan product is how much it costs per year to borrow the money. APR, in contrast, includes the interest rate and in some cases additional fees. Those fees can include:

Origination fees
Mortgage insurance or PMI
Mortgage discount points
Some closing costs

A helpful way to make a fair comparison between lenders is to look at the APR of each one. The lower the APR, the better.

Credit Card APR

Credit card APRs typically do not factor in fees, but can still be incredibly high. At the time of this writing, the average credit card APR for accounts charged interest is 16.17%. When you carry a balance on your credit card, you’re paying around 16.17% in interest per year. You might even pay more if your APR is higher than average.

That’s why it’s essential to pay off your credit card in full each month. You can avoid paying interest on your credit card if you only charge what you can pay off each month. Then, make sure you make that credit card payment on time.

Fixed vs. Variable APR

You’ll see fixed APRs, mostly with loans. A fixed APR means the interest rate stays the same for the life of the loan.

Credit cards usually carry a variable APR, meaning the interest rate can fluctuate. The interest rate changes based on the index it’s tied to, such as the prime rate. When the prime rate changes, the credit card APR will likely change.

Again, if you pay off your credit card balance each month, you won’t have to worry about the variable credit card APR.

Other Types of APR

There are different types of APRs for credit cards and some lines of credit including:

Purchase APR

The purchase APR is the interest rate you’ll pay when using a credit card to buy something. For example, you swipe the card at Target and don’t pay the balance off in full by the end of your grace period. You’ll pay the purchase APR monthly until you pay the balance off in full.

Balance Transfer APR

The balance transfer APR is the interest you’ll pay to transfer a balance from one credit card to another. Some cards offer a 0% introductory APR for balance transfers (more on this below).

Cash Advance APR

Cash advances can come with high APRs. Before using your credit card for a cash advance, find out how much it will cost you. You can find this information in your credit card agreement.

Penalty APR

The penalty APR is the interest rate you pay if you don’t follow your credit card agreement terms. For example, missing a payment could trigger a penalty APR.

Introductory APR

The introductory APR is a ‘teaser rate’ or a way to get you to use the card or take the loan. Like we said earlier, balance transfer cards can offer 0% APR to start, usually 6 – 12 months. If you don’t pay off the balance within the introductory period, the balance is subject to the regular APR.

How to Get the Best (Lowest) APR

You always want to aim for the lowest APR you’re qualified for to save the most money. Here’s how to show lenders you’re a responsible borrower and worthy of the best APR.

Pay Your Bills on Time

The largest part of your credit score is your payment history. Credit card companies and lenders will check your credit score and look at how well you pay your bills.

If you don’t have any late payments, it shows lenders that you can afford your debts, and aren’t at a high risk of default.

Keep Credit Utilization Low

Your credit utilization rate compares your outstanding credit to your total credit line. As your credit utilization increases, you’re at risk of lowering your credit score.

It’s best to have no more than 30% of your credit line outstanding at once.

Improve Your Credit Score

Maintain good credit habits and review your credit report once a year. Make sure all information in your credit report is fair and accurate. You can dispute any inaccurate information with credit bureaus to boost your credit score.

What Is APY

APY, or annual percentage yield, refers to the annual amount you earn on a savings account, money market, CD or other savings product.

Unlike APR, the APY factors in compounding, whether daily, monthly, quarterly, or annually. Compound interest is the interest you earn on your earnings. The higher the APY, the more money you’ll earn.

Is APY Variable?

APYs are almost always variable and fluctuate with the market. CDs are the exception as they usually have a fixed APY for the term of the CD.

How to Find the Best (Highest) APY

To find the highest APY, check out online bank accounts. These banks usually have little to no fees and offer high APYs. You can start with our list of best online bank accounts.

Here’s what to look for:

APY – the higher, the better.
Know the requirements. Read the fine print to find the minimum balance or minimum deposit requirements.
Know how long you must keep the funds in the account to earn the highest APY.

FAQs

What is a good APR?

A good APR depends on your circumstances. It differs for each type of loan and each situation. With great credit and a low debt-to-income ratio, you can get the lowest APRs available.

What is a good APY?

APYs often vary. In some markets, 2% – 3% may seem great or considered low in other market conditions. Compare the APY of similar products, like high-yield savings accounts. Aim to get a higher than average APY.

Where can I find my credit card APR?

The easiest place to find your credit card APR is on your credit card statement. You should see a section titled “Interest Charge Calculation” near the bottom. You can also find it in the section that calculates the interest you owe.

Final Thoughts

What is the key difference between APR and APY? APR is how much a loan or credit card balance will cost you, and APY is how much you can earn on your savings or investment.

Do your best to show creditors you are financially responsible. This will maximize your chances of getting the lowest APR or the highest APY so you can make the most of your money.