APR vs. APY, and why your card quotes APR
5 min read · Credit cardsAPR is the annual percentage rate: the yearly rate before any compounding. APY is the annual percentage yield: what you actually earn or pay over a year once interest is charged on interest.
If interest compounds monthly, the monthly rate is APR ÷ 12. APY is then (1 + APR ÷ 12)¹² − 1, which is always a little higher than the APR.
Lenders quote APR because it is the smaller number. Savings accounts quote APY because it is the larger number. Both describe the same underlying rate.
For a credit card at 22.9% APR, the true annual cost when a balance is carried all year is closer to 25.6%.
Worked example
A card at 22.9% APR, compounded monthly
- 1Monthly rate: 22.9% ÷ 121.9083%
- 2Growth over 12 months: 1.019083¹²1.2545
- 3APY25.45%