Whether you’re looking to start a savings goal or take out a loan, it’s vital to understand how interest (earned or paid) is calculated. Understanding the ins and outs of Annual Percentage Rate (APR) and Annual Percentage Yield (APY) can help you earn more money and help you save more money. Keep reading below to learn how APY and APR work, along with common misconceptions and how One’s free online banking compares to other banking services and credit cards.
What is APY?
APY (Annual Percentage Yield) measures the interest you could earn over the course of a year. APY is expressed as a percentage based on the compound interest you earn on the principal dollar amount in your account. This typically applies to savings accounts, certificates of deposit, and money market accounts.
How APY is calculated:
APY = (1 + Periodic Rate)Number of periods – 1
$3,000 in a savings account that earns 1.00% APY* and compounds monthly = $30.14 yearly interest earned.
How APY can earn you money
What’s great about APY as opposed to simple interest is that it factors in compounding interest. Compounding happens when you earn interest on the money that you’ve invested. Compound interest is the principal amount and your returns which is your interest that is accumulating. So when you have a savings account, a money market account, a certificate of deposit, or a Roth IRA, they will use APY to calculate the interest on your money at a specified rate. If you want to be strategic, choose a banking service that offers the best APY rate to help your money earn the most interest. Compare and research rates from different banking services, banks, and brokerages to select the one that can help grow your money the fastest.
What are the misconceptions of APY?
Many misconceptions of APY are linked to high-yield savings accounts. One of the biggest misconceptions of APY is that the interest rate is always the same for a high yield savings account. High yield savings accounts have variable interest rates, which means they can change over time. The good thing about it is that no matter how much it changes, the APY on a high yield savings account is likely higher than a traditional savings account. Another misconception is that your traditional bank will give you the best APY. Always shop around for the best interest rate you can find and make sure there are no hidden fees. Often, a traditional bank may charge you a monthly maintenance fee to hold your account, defeating the purpose of gaining interest on your money.
What is APR?
APR (Annual Percentage Rate) measures the rate the lender will charge you over the course of a year. APR is expressed as a percentage. This typically applies to credit cards, mortgages, personal and car loans.
How APR is calculated:
APR = Periodic Rate x Number of Periods in a Year
$3,000 credit card balance that charges 12% APR⁑ = $188 yearly interest paid ($15.66 monthly interest paid).
How APR can save you money
One of the easiest ways that APR can save you money is by opening a credit card with a fixed, affordable APR or transferring a balance to a credit card with a lower, more affordable rate. Unlike One, most traditional credit cards charge a balance transfer fee for moving your debt from one card to another. A balance transfer can help you save more in the long run if the new APR rate is significantly lower, 19% APR vs. 12% APR⁑, which can keep hundreds of dollars in your Pocket over the course of the loan. In addition, this transfer can help give you some additional breathing room to pay off your credit card balance without being charged as much interest.
What are the misconceptions of APR?
Most people have a common APR misconception that it’s the same as an interest rate. Your APR measures the cost of borrowing money. In comparison, your interest rate is the percentage you will be charged on your principal loan amount. APR works the same way because it includes the interest rate and any other costs associated with the interest you’re charged with. Additional costs can include closing costs if you’re buying a home, lender fees, and insurance. That’s why it’s always important to read the fine print before you take out a new loan or credit card.
How One’s APY and APR compares to other banking services
APY and APR are two of the most important and foundational concepts to learn on your financial journey. The best tip is to shop around and compare rates. Knowing how frequently the interest compounds for APY and knowing if your interest rate is fixed or variable can help you save or earn thousands over the course of your financial relationship. Low advertised rates can be based on a number of hidden factors buried in fine print that are only accessible to people who have great to excellent credit scores. One’s industry-low 12% APR⁑ is fixed and offered to everyONE!
Many traditional credit cards lure customers in with a zero percent APR for a promotional time, between twelve and twenty-four months, but after the promo time has ended, their interest rate skyrockets. If you calculate the total purchase price with interest and plan to pay it off within the promotional period, it can be helpful. But if you need to carry a balance for an extended period; the monthly interest fees, along with the minimum payments, after the promotional period ends could be financially devastating.