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APR is the percentage rate, typically for loans, that you’ll pay. It doesn’t include compounding in the percentage. APY is the percentage yield that you can expect over the year that includes the compounding interest you’ll have earned, typically on an investment.

Easier to think of it was APR is the percentage rate and interest you’ll pu if your borrow money, while APY is how much you’ll earn in interest based on a deposit you make somewhere.

Lets use some nice, easy, round numbers to illustrate these concepts.

APR is short for Annual Percentage Rate, which is the interest rate that is credited to the account. For our example, let's use 12%. Let's use a nice, round starting balance of $10,000 for our deposit.

Charging interest more frequently than once a year means the annual rate gets divided and applied based on the frequency. So if you have a 12% APR and interest is applied annually, at the end of the year, you will be paid $1,200 in interest. If you have a 12% APR and interest is applied quarterly, then at the first three months, you will be paid $300 in interest. (12% / 4 = 3%) If your interest is applied monthly, then at the end of the first month, you'll be paid $100 interest (12% / 12 = 1%)

Compounding interest is when the interest you've earned gets added to the deposit balance that's eligible to earn interest, and this is where the frequency of interest being applied starts to matter.

Let's say you earn interest twice a year. At month six, you will earn $600 interest. (10,000 balance, 12% APR, twice a year means 12/2 = 6%) At month twelve, you will earn $636 interest ($600 interest from your original $10,000 deposit, plus $36 interest on the $600 interest you earned at month 6!)

So at the end of this year, you will have earned $1,236 in interest on your $10,000 deposit with a 12% APR. The annual percentage yield (APY) on your investment would 12.36%. If your interest was applied monthly, your APY would be 12.68%. More frequent compounding leads to a slightly higher APY with the same APR.

>Is your credit score looked at at all when opening one? Does having a better score mean you get a better rate on investment?

Nope, and nope. The rate is based on the amount you deposit, and in some cases, there may be additional restrictions on when or how much you can withdraw and keep the same rate.

Interesting, thank you for this write up. Is 12% APR pretty common or was that just used as an example?

So why do regular savings accounts exist? Seems like it would just be smarter for everyone to always use high yield saving accounts?

Example

It's extremely rare to have a saving account pay 12% interest. Certificates of Deposit, which are like a super-restrictive saving account, pay less than 6% right now.

I used 12% APR for the example just because it makes the math much simpler and easier to do.

High yield savings accounts tend to have more restrictions than regular savings accounts.

They often require a higher minimum balance, and allow fewer transactions per month. Going below the minimum balance may trigger a monthly fee, a lower rate, or both.

Savings accounts of any kind are a good option for mostly liquid savings that can be fairly quickly accessed. If you have a large amount of cash that you won't need right away, there are better investment options.

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Aha because you're giving up something else in return. In finance there is no free lunch ever.

So what's the catch? Most typically these higher yield savings/deposits will lock out the money for a term (3/6/12 months), or the account requires a minimum balance or deposit, or the better rates only apply to non-local currencies, etc etc it's all up to the bank.

[edit] Credit pertains to debt. Taking out loans is when your credit score matters.

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interesting. Idk if what I have is considered "large" right now, but what would those better investment options be?

The only other things I have looked into are ETFs as pretty stable options and REITs that can pay out bigger dividends

2 main ways banks make money are by charging fees and giving out loans.

Checking accounts are accessed multiple times a day, so pretty volatile.

Savings accounts are accessed less (some even have limits, like 6 a month), so easier for a bank to use to give out loans. As a reward for allowing them to do that, they give you a cut of the interest they earn off loans. Bank of America and similar give terrible rates, starting at 0.01% APY, many online-only banks are now giving >3% APY, some even up to 5% APY (note that these will go down in the future once interest rates on loans go back down).

APR is the actual % that they use for calculations. However, sometimes they pay-out the earned interest multiple times a year, which means future interest is on the new, higher balance, so the pay-out is more, so for the year the actual amount of interest earned is more, this is APY, and this is the effect of compounding.

Examples:

1% APR paid once on $10000:
1% • $10000 = $100

1% APR paid semi-annually (twice) on $10000:
0.5% • $10000 = $50
0.5% • $10050 = $50.25
So an extra 25¢ where the APY is 1.0025%.

> Is your credit score looked at at all when opening one

It can be.

> Does having a better score mean you get a better rate on investment?

No.