The APY is the number to look at, and is a function not just of the interest rate itself, but how often the interest is credited to your balance:
Let's say you open an account with $100, and the account advertises a 5% interest rate: If the interest is paid annually, after 12 months, you'll have $5 added to your balance. If it's paid monthly, however, you will get (5%/12) added at the start of each month, and by the second month, you'll be earning interest not only on the $100, but also on the 41.67cents interest you got paid the first month! By the third month, you are earning (5%/12) * ($100.4167 + 41.84c), and so on...
Behold the miracle of compound interest!
If you can find an account where interest is compounded daily, you make out like a bandit!
(Ironically, it is this "daily compounding" which turns what SEEMS like a reasonable interest rate on a credit card debt very quickly into a quagmire for many folks with poor math skills...)
· 1 decade ago