Interest rates are quoted in several conventions that look interchangeable and are not. The distinctions are small on a savings account and large on a credit card, which is unfortunate, because the card is where reading them wrong costs the most.
APR is an annualized quote, not what you pay in a year
An APR is a nominal annual rate. On a credit card, the number the issuer actually applies is the daily periodic rate — the APR divided by 365 — charged against the balance each day and added to it.
Because yesterday's interest is in today's balance, the effective cost of carrying a balance for a full year is higher than the APR. A 24% APR compounded daily works out to roughly 27% actually paid. That gap is not a fee or a trick; it is what compounding does, and it is why the quoted rate understates a carried balance and never overstates it.
For loans with a fixed payment — a mortgage, a car loan, a personal loan — the APR is more informative, because it is defined to include certain fees rolled into the borrowing cost. Two loans with the same interest rate and different APRs differ in fees. That is precisely the comparison the number exists to enable.
APY is the one that already accounts for compounding
APY takes the compounding frequency and folds it in, so it answers the question directly: leave a dollar here for a year, untouched, and this is what you have.
That makes APY comparable across accounts and APR not. A savings account quoting 4.00% APY beats one quoting 4.00% APR compounded monthly, by a small but real margin. Deposit products are usually quoted in APY and borrowing products usually in APR, which is not a coincidence — each convention flatters the side quoting it.
When comparing anything to anything, convert to the same convention first. Comparing an APR against an APY is comparing a rate that has been adjusted for compounding against one that has not.
Variable means indexed, and the index moves
Most credit cards and many lines of credit are variable-rate: the rate is a published benchmark plus a fixed margin. When the benchmark moves, your rate moves, generally within a billing cycle or two, and no notice is required for the part that comes from the index.
The consequence for planning is that a payoff projection built on today's rate is a projection about today's rate, not a schedule. On a fixed-rate loan the projected end date is close to a fact. On a variable-rate balance it is a scenario, and worth re-running when the benchmark moves.
The grace period is the highest-value rule on the card
Pay the full statement balance by the due date and a credit card charges no interest on purchases at all, whatever the APR says. The rate only ever applies to a balance carried past the due date.
Two things end that protection in ways people rarely expect. Once you carry a balance, many issuers stop granting the grace period on new purchases until you have paid in full again — so new spending starts accruing from the day it posts, not from the next statement. And cash advances typically have no grace period ever, plus their own higher rate, starting immediately.
This is why "what is my APR" is often the wrong question. The right one is whether the statement balance is being paid in full, because the answer changes the effective rate from the quoted number to zero.
Where the rate actually matters
Reading rates correctly matters most where the balance is large or long-lived, in roughly this order: a carried card balance, then any variable-rate debt, then long-horizon fixed debt, then savings.
Savings comes last on that list not because the rate is unimportant but because the spread between a competitive account and a poor one is a few percentage points on a balance you are trying to keep modest, while the spread on a carried card balance is twenty-odd percentage points on a balance you are trying to eliminate. The same one-point improvement is worth very different amounts depending on which side of the ledger it lands.
The general form of the rule: a percentage is only meaningful multiplied by the balance it applies to and the time it applies for. Rank by that product, not by the size of the rate.
This post is educational and general in nature. It is not personalized financial advice.