APY vs. Interest Rate: What Is the Difference?
APY includes the effect of compounding; the interest rate does not. Here is how the two differ, how to calculate APY, and which number to use when comparing savings and CDs.
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The interest rate is the base rate a bank pays; APY (annual percentage yield) is what you actually earn in a year once compounding is included. APY is always equal to or higher than the interest rate. For example, Barclays lists its 12 month CD at a 4.40% interest rate and a 4.50% APY, because interest compounds daily. When you compare savings accounts or CDs, compare APY.
Bank websites often show two numbers next to each other, and it is not obvious which one matters. The short answer is APY. Here is why, with the math.
What is an interest rate?
The interest rate, sometimes called the nominal rate, is the annual rate the bank uses to calculate interest before compounding. If a bank paid simple interest once a year, the interest rate would be all you need: $10,000 at 4% earns $400.
What is APY?
APY, or annual percentage yield, is the total you earn in a year, as a percentage, assuming you leave the interest in the account. It includes compounding: the interest you earn starts earning interest of its own. US banks must disclose APY on savings accounts and CDs under the Truth in Savings Act, so every account shows it in the same terms. That is what makes APY the fair number to compare.
How compounding turns a rate into APY
The more often interest compounds, the bigger the gap. Here is a 4.00% interest rate compounded at different frequencies:
| Compounding | APY | Interest on $10,000 in a year |
|---|---|---|
| Annually | 4.00% | $400.00 |
| Monthly | 4.07% | $407.42 |
| Daily | 4.08% | $408.08 |
The difference between monthly and daily compounding is small. The difference between a rate and its APY becomes noticeable on larger balances and higher rates, which is why banks advertise the bigger number.
The APY formula
APY = (1 + r / n)n minus 1, where r is the interest rate as a decimal and n is the number of compounding periods in a year.
Example with daily compounding at 4.40%: (1 + 0.0440 / 365)365 minus 1 = 0.04498, or about 4.50% APY. That matches Barclays’ 12 month CD, which lists a 4.40% interest rate and a 4.50% APY (valid as of Oct 7, 2026, checked on the Barclays website Oct 8, 2026).
Example: comparing two accounts
Say one bank advertises a 4.00% interest rate compounded monthly, and another advertises 4.05% compounded once a year. Which pays more?
- Bank A: 4.00% compounded monthly is 4.07% APY, or about $407 on $10,000 in a year.
- Bank B: 4.05% compounded annually is 4.05% APY, or about $405.
Bank A pays more even though its rate looks lower. If both banks had simply shown APY, you would have seen that at a glance. That is exactly why the law requires APY, and why you should ignore the interest rate when comparing.
Compounding vs. crediting
Banks often compound interest daily but credit it to your account monthly. Compounding is how often interest is calculated on your growing balance; crediting is when it shows up in your account. Barclays, for example, says its CD interest compounds daily and is credited monthly. The APY already reflects the compounding, so you do not need to do anything with these details except know that the APY is the full picture, as long as you leave the interest in the account.
APY vs. APR
APR, annual percentage rate, is the number you see on loans and credit cards. It shows the yearly cost of borrowing and generally does not include compounding. APY shows what you earn. A simple way to remember it: APY is for money you save, APR is for money you owe.
Which number should you compare?
Always APY. Two accounts with the same interest rate can have different APYs if they compound differently, and APY already accounts for that. Every rate on BankingPicks is shown as APY, matching what the bank discloses, with the date the bank says it applies.
What APY does not tell you
- Whether the rate is guaranteed. A savings APY is variable and can change any time. A CD APY is fixed for the term.
- Whether you will qualify. Some accounts pay their headline APY only if you meet rules, such as direct deposit or a monthly deposit. Our guide to APY requirements shows how to compare the rate you will actually earn.
- Balance tiers. Some APYs only apply up to, or above, a certain balance.
- How long a promotion lasts. Boosted rates for new customers often last a few months, then drop to the standard APY.
How much does APY really earn?
With today’s top rates: Happen Bank pays 4.20% APY with $250 in monthly deposits, which earns about $420 on $10,000 in a year. Always.bank pays 4.10% APY with no rules, about $410. The FDIC national average savings rate of 0.38% (as of Oct 19, 2026) earns about $38. See how much other balances earn in how much interest $10,000 earns and how much interest $50,000 earns.
Compare every account we track, with live rates and dates, on our best high yield savings accounts page. See what a certificate of deposit pays by term in what is a certificate of deposit.
Frequently asked questions
Is APY or interest rate more important?
APY. It includes compounding, so it shows what you actually earn in a year, and banks must disclose it the same way, which makes it fair to compare.
Why is APY higher than the interest rate?
Because of compounding. Interest you earn during the year starts earning interest too, so the total yield is a little higher than the base rate.
Can APY and interest rate be the same?
Yes, if interest compounds once a year. With more frequent compounding, APY is higher.
Is APY the same as APR?
No. APY measures what you earn on savings including compounding. APR measures the yearly cost of a loan or credit card.
Does APY change?
On savings accounts, yes; the APY is variable. On CDs, the APY is fixed for the term once you open the account.
Compare today’s top savings rates
Happen Bank LevelUp SavingsAPY as of Oct 23, 20264.20%with $250 or more in deposits each monthReview →
