APR Is Not APY, and Lenders Know It

Open a credit card statement and a savings account statement side by side, and the two numbers on them are answering different questions — even when the underlying math is the same formula. The card shows APR. The account shows APY. Neither is wrong, and neither is optional: two separate federal rules require each one, on each specific product.

Two rates, one formula

APR — annual percentage rate — is the nominal rate: the periodic rate multiplied by the number of periods in a year, with compounding ignored. APY — annual percentage yield — is the effective rate: what a dollar actually grows to (or a debt actually costs) in a year once compounding is counted.

The relationship between them is one formula:

APY = (1 + APR / n)ⁿ − 1

where n is the number of compounding periods per year. The two numbers are equal only when interest compounds once a year. The moment it compounds more often than that — monthly, daily, however the account or card is structured — APY pulls ahead of APR, and it never pulls the other way.

The real gap, from the Fed's own numbers

The Federal Reserve publishes the average credit card rate charged by commercial banks every month in its G.19 release. The most recent figures, for May 2026:

The second row is the one that matters if you're carrying a balance: it's the annualized ratio of finance charges actually billed to the balances they were charged against. At 22.15% APR, daily compounding adds 2.64 percentage points by the time the year is out — not because of a fee, not because of a mistake, just because of how compounding works on a rate that high.

Why the gap is regulatory, not accidental

This isn't a marketing trick either institution is choosing. Two separate rules assign each number to its product:

Regulation Z — the Truth in Lending rule, at 12 CFR Part 1026 — governs credit disclosures. Sections 1026.18 and 1026.22 require creditors to disclose the annual percentage rate, computed the way Appendix J to the regulation specifies. It's the number written into every loan and credit card agreement.

Regulation DD — the Truth in Savings rule, at 12 CFR Part 1030 — governs deposit accounts. Section 1030.4 requires institutions to disclose the annual percentage yield, computed the way Appendix A to the regulation specifies. It's the number advertised on every savings account and CD.

Put together: a bank isn't picking the friendlier-looking number for either product. It's disclosing the one its regulation names — APR on what you borrow, APY on what you save. The two numbers just happen to flatter their respective products, because APY is structurally the larger one whenever compounding applies.

Compounding frequency changes the gap — and it grows with the rate

At a modest rate, the difference is almost invisible. At a credit-card-sized rate, it isn't:

At 5%, moving from annual to daily compounding adds about 0.13 points — a rounding error. At 22.15%, the same move adds 2.64 points. The gap between APR and APY isn't a fixed markup; it scales with the rate itself, which is exactly why it matters most on the products where the rate is already high.

Run it with your own rate

Enter any APR and compounding frequency, or flip it around and convert an advertised APY back to the nominal rate — useful when one offer states one and a competing offer states the other.

Comparing offers the right way

The practical rule is simple: compare APY to APY when shopping savings accounts and CDs, and APR to APR when shopping loans and credit cards. When two offers state different types of rate, convert one before comparing — never compare an APR on one card against the APY on another, even though both are "annual rates." One more caveat on the lending side: an advertised APR can also fold in fees beyond the interest rate itself, so matching the compounding math here doesn't replace reading the separate fee disclosure that comes with any loan.