# What Is APR vs APY and Why Your Savings Account Earns Less Than You Think > APR and APY are not the same. APR ignores compounding; APY includes it. The math, the 5% savings example, and how to compare offers properly. URL: https://uttir.com/blog/what-is-apr-vs-apy-and-why-your-savings-account-earns-less-than-you-think Published: 2026-08-24 Author: Uttir Reading time: 4 min Tags: apr, apy, interest, savings, finance, what-is, calculators ## Quick answer **APR** is the annual rate without compounding. **APY** is the annual rate with compounding baked in. For a 5% APR compounded daily, the APY is about 5.13% — a 13 basis point gap. The higher the rate or the more frequent the compounding, the wider the gap. The [Uttir Compound Interest Calculator](/compound-interest-calculator) runs both sides so you can compare offers. If you have compared two savings accounts or two credit card offers, you have seen both *APR* and *APY* in the fine print. They are not interchangeable. APR is the rate without compounding; APY is the rate with compounding. The two numbers can differ by 13 basis points on a 5% savings account, by 30+ basis points on a credit card with daily compounding, and by far more for high-rate promotional offers. This post walks through what each one means, why the gap exists, and how to compare offers properly. ## What APR is **APR (Annual Percentage Rate)** is the annual interest rate, expressed as a simple annualized number, without any compounding inside the year. So a 5% APR on a $10,000 loan for 1 year charges 5% × $10,000 = $500 in interest over the year, regardless of when the payments are made. For a credit card, the APR is what the issuer quotes in the Schumer box. The card uses a daily periodic rate (APR ÷ 365) to compute interest each day, and then compounds those daily charges. The result is that the effective rate you actually pay is higher than the APR — sometimes by 13+ basis points at 5%, by 50+ basis points at 18%, and by more at higher rates. ## What APY is **APY (Annual Percentage Yield)** is the effective annual rate, with compounding included. It is the number you actually earn (or pay) over a year, expressed as a single percentage. For a 5% APR compounded daily, the APY is: ``` APY = (1 + 0.05/365)^365 - 1 = 0.05127 = 5.127% ``` So $10,000 at 5.127% APY earns $512.67 in interest over the year, not the $500 the APR would suggest. The extra $12.67 is the compounding. For a savings account, the APY is the right number to compare across banks. For a credit card, the APY is the effective cost of carrying a balance — and the right number to compare across cards. ## Why the gap exists The gap is purely a function of compounding frequency. The math: CompoundingFormula5% APR → APY Annual (1×/year)(1 + r/1)^1 - 15.000% Semiannual (2×/year)(1 + r/2)^2 - 15.063% Quarterly (4×/year)(1 + r/4)^4 - 15.095% Monthly (12×/year)(1 + r/12)^12 - 15.116% Daily (365×/year)(1 + r/365)^365 - 15.127% Continuouse^r - 15.127% The gap widens fast as the rate goes up: APRAPY (daily)Gap 2%2.020%2.0 bps 5%5.127%12.7 bps 10%10.516%51.6 bps 18%19.716%171.6 bps 25%28.393%339.3 bps At credit-card rates, the gap is meaningful. At a 25% APR card with daily compounding, the APY is 28.4% — the difference between owing $2,500 in interest and $2,840 in interest on a $10,000 balance over a year. ## What to look at when comparing offers - **For savings accounts, CDs, money market accounts:** always compare **APY**. The bank is required to quote the APY by federal law (US Truth in Savings Act, EU consumer credit rules). - **For credit cards:** compare **APR** for the headline rate, then mentally convert to APY if you carry a balance. The 13-50 bps gap matters at high rates. - **For mortgages:** the APR is a slightly different number (it includes some closing costs), but the comparable rate is the **note rate** (the rate the lender quotes on the loan itself). Compare the note rate for a clean comparison; use the APR to compare total cost including closing costs. - **For personal loans and auto loans:** the APR is the right number, since these loans do not compound inside the year. ## Common mistakes - **Comparing APR to APY.** The two are not interchangeable. Always convert to the same number before comparing offers. - **Ignoring compounding frequency.** “5% compounded daily” earns more than “5% compounded monthly.” For the same APR, daily is the most generous for savers and the most expensive for borrowers. - **Trusting the headline APR for promotional rates.** Credit card “0% APR for 18 months” is real, but the post-promo APR is typically 22-29% — and the daily compounding from the start means the moment the promo ends, you start paying 22%+ APY on whatever balance is left. - **Confusing the savings account APY with the CD APY.** A 12-month CD and a savings account may have the same APY on day 1, but the CD locks you in, and the early-withdrawal penalty can be 3-6 months of interest. ## How to compare offers properly For any offer — savings, CD, credit card, loan — convert everything to APY first, then compare on the same basis. The [Uttir Compound Interest Calculator](/compound-interest-calculator) runs both sides: enter the APR, the compounding frequency, and the principal; it returns the year-end balance and the effective APY. For a 5% APR savings account compounded daily, you will see the $10,000 grow to $10,512.67 in a year, with the APY listed as 5.127%. For the inflation side of the question (is 5% APY really 5% in real terms?), the [Uttir Inflation Calculator](/inflation-calculator) is the right tool. For the loan side, the [Uttir Mortgage Calculator](/mortgage-calculator) and [Loan Calculator](/loan-calculator) cover the financing math. ## Bottom line APR is the rate, APY is what you actually earn or pay after compounding. For a 5% savings account the gap is 13 bps; for a 25% credit card the gap is 339 bps. Always compare APY to APY. The [Uttir Compound Interest Calculator](/compound-interest-calculator) does the conversion in your browser, no upload, no signup. ## Related tools - [Compound Interest Calculator](https://uttir.com/compound-interest-calculator) — Project savings growth with compound interest and monthly contributions, year by year. - [Mortgage Calculator](https://uttir.com/mortgage-calculator) — Estimate monthly mortgage payments, including down payment, property tax, and insurance. - [Loan Calculator](https://uttir.com/loan-calculator) — Calculate monthly payments, total interest, and a full amortization schedule for any loan. - [Inflation Calculator](https://uttir.com/inflation-calculator) — Calculate how inflation erodes purchasing power over time. Custom rate or historical U.S. CPI averages from 1990 onward. - [Percentage Calculator](https://uttir.com/percentage-calculator) — Three percentage tools in one: percent of a value, ratio as a percent, and percent change. --- For the full HTML article, visit https://uttir.com/blog/what-is-apr-vs-apy-and-why-your-savings-account-earns-less-than-you-think. This file is the markdown rendering at https://uttir.com/blog/what-is-apr-vs-apy-and-why-your-savings-account-earns-less-than-you-think.md. See https://uttir.com/llms.txt for a site-wide summary.