APR vs APY

Please understand the subtle yet important difference between APR and APY.

APR = Annual Percentage Rate

APY = Annual Percentage Yield

"A credit card company might charge 1% interest each month. Therefore, the APR equals 12% (1% × 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be 12.68% [(1 + 0.01)^12 – 1 = 12.68%] a year."

The key insight: APR is the simple interest rate, while APY accounts for the compounding effect. This is why savings accounts advertise APY (it looks higher) while credit cards often show APR (it looks lower).