What is Annual Percentage Yield (APY)?

APY stands for Annual Percentage Yield — which is an estimate of how much interest your savings will earn in a year. Unlike a simple interest rate, APY factors in compound interest, which is when you earn interest not just on your initial deposit but also on the interest you’ve already accumulated. 

Rather than comparing interest rates, it’s better to focus on looking at the APYs when you’re choosing where to store your money.

What does APY mean?

APY is the total amount of interest you’ll earn in one year, expressed as a percentage. It’s the most important number to look at when comparing savings accounts or certificates of deposit (CDs).

The magic of APY lies in compound interest. When your account compounds interest, you start earning returns on your returns. If you have $10,000 earning 4% in interest with monthly compounding, you don’t just earn $400— you earn $408 because each month’s interest gets added to your balance and starts earning interest too. If that interest only compounded annually, however, you would earn $8 less.

Banks are required by federal law to disclose APY, making it easy to compare accounts apples-to-apples.

Ready to maximize your savings? Compare today’s best savings rates to see which accounts pay the most.

What’s a typical APY?

APY varies dramatically based on where you save and the type of account you open.

That difference between 0.60% and 4% is massive. On a $10,000 balance, you’d earn $60 per year at the national average versus $400 at a top rate — that’s over $340 left on the table.

The lesson? Shop around. Don’t settle for a low rate when some banks and credit unions are willing to pay exponentially more for your deposit.

How APY and compounding work together

If you’re looking at an APY calculator and wondering about the wizardry behind the numbers, here’s the formula for compounding interest:

In this formula, “r” is the interest rate, and “n” is the number of compounding periods per year – 365 in the case of daily compounding, for example, and 12 for monthly compounding.

If you aren’t into crunching numbers, that’s okay. Instead, here’s the simple reason why APY matters more than interest rate: compounding frequency changes your actual earnings. Look at three accounts with identical 4% interest rates but different compounding:

Daily compounding earns you an extra $8 per year on this balance. Over five years, that gap widens to nearly $50. This is why you should always compare APY, not interest rates. APY already includes compounding, so you’re seeing the true earning power.

Want to see how much you could earn? Use Bankrate’s savings calculator to run your numbers.

APY vs. APR: Know the difference

APY shows what you earn on savings. APR (annual percentage rate) shows what you pay on loans. When you’re saving money, you want the highest APY possible. When you’re borrowing money — for a mortgage, personal loan, or credit card — you want the lowest APR possible. Learn more about APY vs. APR.

For loans, APR includes both the interest rate and fees, giving you the total cost of borrowing. That’s why a mortgage might advertise a 6.5% interest rate but have a 6.75% APR once you factor in closing costs and fees.

Is APY variable or fixed?

It depends on the account.

You’ll find fixed APYs on accounts like CDs, which lock in your rate for the entire term (6 months, 1 year, 5 years, etc.). Your rate won’t change even if market rates drop. Banks and credit unions typically offer higher rates on CDs because you’re promising to leave your money in until maturity. They’re willing to pay more for that guarantee (and they’ll penalize you if you break that promise.

You’ll find variable APYs on savings accounts, money market accounts and checking accounts, which means they have rates that fluctuate. Banks will adjust rates based on Federal Reserve policy and competition. Variable rates can change at any time; your bank or credit union doesn’t have to notify you in advance.

The Federal Reserve’s benchmark rate directly impacts APYs. When the Fed raises rates, banks typically increase savings APYs to attract deposits. When the Fed cuts rates, savings APYs usually fall too. Bankrate’s Interest Rate Forecast calls for three Fed rate cuts, for a total of 0.75%, throughout 2026. If that prediction proves to be true, you can expect APYs to drop on all types of savings products. 

This is why it’s smart to lock in high fixed CD rates when they’re available — you’re protecting yourself from future rate cuts. It’s also a reminder of the importance of monitoring the yield you’re receiving on variable accounts. If your bank slashes the APY on your savings account, you may want to shop around for a new home for your money.

How to find an account’s APY

By law, banks must display APY prominently. You’ll find it:

• On bank websites and account comparison pages
• In account disclosures and fine print
• On monthly statements

Don’t just look at interest rate — that doesn’t tell the full story. The APY is what actually matters for your bottom line. If you’re comparing accounts, Bankrate’s rate tables make it easy to see which banks pay the most, updated daily.

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