How APY Can Affect Your Credit
APY, or Annual Percentage Yield, is the compound interest rate that many credit card companies charge. This percentage differs from APR, or Annual Percentage Rate, because APY takes into account a compounded rate. This rate is compounded monthly. So for a person that has a credit card with an APY of 1%, a balance left on the credit card for the next month will be charged an APY of 12%. But if a person continues to carry a balance the APY will go higher, depending on the rate of compound interest.
Credit card users need to be able to tell the difference between APR and APY when searching for a good rate on a credit card or loan. Typically, a bank or credit card company can offer a low rate. Maybe it even looks to good to be true, and it probably it. This is because credit card companies and banks advertised the APR for the loan and not the APY. The interest rates on carried balances can go significantly higher than the advertised rate according to the rate of compound interest. Credit card companies can compound interest monthly, quarterly, or semi-annually. The best APY rate for a credit card holder is a semi-annual APY.
As long a credit card holder does not continue to carry a balance month after month, the APY will not make a significant impact on what they pay. But for those that have a continuous balance on their card every month, finding the best APY rate is very important.
A good tip for those shopping for a new loan or credit card is to question the company about their advertisements. Ask the company if what they are quoting is the APR or the APY on the line of credit. Another reason to ask this question is because when you compare rates from one company to another, you want to make sure that you are comparing the same types of numbers. Otherwise, your comparison will not be fair.
Customers shopping for a savings account, CD, or other investment product will usually find that the opposite is true. When these products are advertised, the APY is used more often. This is because the APY is always higher than the APR, and banks want customers to see the maximum potential for the product.
If you find that your credit card does not offer you the best APR or APY rates, consider looking into a transfer balance. This will allow you to move the balance of your current card onto another credit card that offers lower rates. But just like with your first card, make sure to read the fine print and look past a tempting APR to see what you will be paying with the annual percentage yield.