SAFE October 31, 2023 at 8:30 AM

# What’s the difference between interest/dividend rates, APY, and APYE?

You’ve seen promotions for savings products such as certificates, savings, and checking accounts that show annual percentage yield (APY), interest rates or dividend rates.

Promotions for loans provide APRs and the interest rate.

Your banking statements may also show something called the annual percentage yield earned, or APYE on deposit accounts.

Here’s what all that alphabet soup means and why it’s important for your finances.

#### Dividend/interest rate

The dividend rate is the declared rate paid on an account. Many deposit accounts receive an interest rate (banks) or dividend rate (credit unions). This rate does not take into account the compounding of earnings within the year. Savings and checking accounts providing easy access to funds may pay lower rates. Money market accounts and certificates may pay higher rates. The quoted rates are applied to balances in the accounts, and financial institutions may pay interest or dividends monthly, quarterly, semi-annually, or annually.

For example: If you have \$100,000 on deposit and the account earns an interest or dividend rate of 1 percent, you will receive approximately \$82 a month. The earnings are calculated by multiplying the account balance by the dividend/interest rate. That total is then divided by 365 and multiplying by the number of days in month. Here’s what that looks like for a month with 30 days: (100,000 X 1%)/365 X 30 = \$82.20

#### APY

The annual percentage yield (APY) refers to the amount of money you earn on a credit union or bank account over one year through dividends or interest. Unlike the dividend/interest rate, APY takes into account compound earnings. So each time you time earn dividends/interest, those earnings are adding to your balance.

Back to the \$100,000 example. In month one, you earn about \$82, bringing your balance to \$100,082. The next month, that 1 percent dividend rate is now applied to \$100,082. You’ve now earned \$82.26 in dividends for that month, bringing your account balance to about \$100,164. And so on. Basically, you earn dividends/interest on your dividends/interest!

#### APYE

The annual percentage yield earned (APYE), is included on your bank or credit union statements for deposit accounts. The APYE is an annualized rate that reflects the relationship between the amount of dividends actually earned on the account during the period and the average daily balance. The APYE is affected by deposits and withdrawals made during the statement period. The APYE may also be a lesser amount than the dividend rate, but this does not mean that your account was not paid the correct dividend rate.

#### APR

APR, or annual percentage rate, applies to open-ended loans, like credit cards, and for fixed-term loans, like an auto loan. For credit cards, interest rates are typically stated as a yearly rate and are applied when you carry a balance from one month to the next. Let’s say you have a credit card with an APR of 17.99% and want to figure out how much interest you will accrue on a balance of \$1,000. First, divide 17.99% by 12 to find the monthly rate, which is approximately 1.49%. Then, multiply that 1.49% rate by the \$1,000 you owe (1,000 X 0.0149) and you get \$14.90 in interest for that month. The good news is you can avoid paying interest on your credit card if you pay off your balance due each month. 