Definitions checked against the Federal Reserve’s Truth in Savings (Regulation DD) guidance on October 20, 2026.
Banks advertise savings accounts and CDs using two numbers that look almost identical: the interest rate and the APY. They aren’t the same thing, and knowing the difference makes it much easier to compare accounts fairly.
Table of Contents
The Short Answer
- Interest rate is the base rate the bank pays on your balance, before compounding.
- APY (annual percentage yield) is the total return you’d earn in a year once compounding is included.
Under the federal Truth in Savings rules, APY is “a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and the frequency of compounding” over a 365-day period, according to the Federal Reserve. Banks must disclose both the interest rate and the APY on interest-bearing deposit accounts.
Why APY Is Usually Higher Than the Interest Rate
Compounding means you earn interest on interest you’ve already earned. The more often a bank compounds, the higher the APY will be compared with the base rate.
| Interest rate | Compounding | Resulting APY |
|---|---|---|
| 4.00% | Once a year | 4.00% |
| 4.00% | Monthly | about 4.07% |
| 4.00% | Daily | about 4.08% |
The differences are small at normal savings rates, which is why APY is the fairest single number for comparing accounts: it already includes the effect of compounding.
How to Calculate What You’ll Earn
For a rough estimate, multiply your balance by the APY. If you keep $10,000 in an account paying 3.50% APY for a full year and the rate doesn’t change, you’ll earn about $350 in interest.
The formula banks use to turn an interest rate into an APY is:
APY = (1 + interest rate ÷ number of compounding periods)number of compounding periods − 1
You don’t need to calculate it yourself, because banks are required to show the APY. It’s useful mainly to understand why two accounts with the same interest rate can show slightly different APYs.
APY vs. APR: Don’t Mix Them Up
APY is used for money you earn on deposits. APR (annual percentage rate) is used for money you pay on loans and credit cards. APR generally doesn’t include compounding, so a card’s real cost can be higher than its APR suggests. When you’re saving, look for APY; when you’re borrowing, look at APR and fees.
Things the Headline APY Doesn’t Tell You
The advertised APY is only part of the story. Before choosing an account, check:
- Is the rate variable? Most savings and money market rates are variable and can change at any time after you open the account. CD rates are fixed for the term.
- Is it promotional? Some banks add a temporary boost. In October 2026, for example, SoFi advertised a 0.90% boost on top of its 3.30% savings APY for six months for qualifying new accounts.
- Are there balance tiers? Some accounts pay the top APY only above (or below) a certain balance. CIT Bank’s Platinum Savings, for instance, paid 3.75% on balances of $5,000 or more and 0.25% below that when we checked.
- Are there conditions? Some rates require direct deposit, a minimum number of debit card purchases or e-statements.
- Are there fees? A monthly fee can wipe out the interest on a small balance.
You’ll find current, dated rates for these and other accounts in our high-yield savings guide and CD rates guide.
Frequently Asked Questions
Is a higher APY always better?
Not always. A slightly lower APY with no conditions and no fees can beat a higher APY that you won’t qualify for, or a promotional rate that drops after a few months.
Why did my savings rate change?
Most savings rates are variable. Banks often adjust them when market interest rates change.
Do CDs use APY too?
Yes. CD rates are quoted as APY, and the rate is fixed for the term. Withdrawing early usually triggers a penalty that can reduce what you earn.
Bottom Line
Compare savings accounts and CDs by APY, not by interest rate, and then look past the headline number at whether the rate is variable, promotional, tiered or conditional. Those details usually matter more than a difference of a few hundredths of a percent.
This article is for informational purposes only and is not financial advice. BankNavigatorr has no affiliate relationships with any bank and is supported by advertising.