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Earning Interest

APY vs. Interest Rate on Savings and CD Accounts — Explained

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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When you’re signing up for a checking or savings account, the first thing you are likely to review is the account’s APY and interest rate. They may seem similar but they are actually two very different terms.

An interest rate is the percentage of your deposit that banks pay you in order to hold your money with them. APY is an acronym that stands for for annual percentage yield. It refers to the total amount of interest you earn on your savings over a year, and it factors in compounding interest. APY gives a truer picture of how much money you will make from your certificate of deposit (CD), savings or money market account, than by looking at a simple interest rate alone.

The higher the APY, the more money you can expect to earn from your deposit in your CD, money market or savings accounts.

Understanding the various types of interest rates

For deposit accounts, there are two types of interest rates you need to know: simple interest and compounding interest.

Simple interest

Simple interest is easy to calculate — it’s calculated only on the principle you deposit in your bank account. It means if you invest $10,000 at an interest of 2%, for instance, you will earn $200 in interest at the end of the year.

Simple interest rates are typically used with brokered CD accounts purchased through brokerage firms like Fidelity, Vanguard or Charles Schwab, said Ken Tumin, founder and editor of DepositAccounts.com, a fellow LendingTree-owned site. Instead of receiving compounding interest, holders of brokered CDs normally get paid simple interest monthly, quarterly, semi-annually or annually.

Compounding interest

Compounding interest is more complicated, because it takes into account the interest you earn on both the interest and principle. When you leave the interest you earn in a bank account instead of taking it out, the overall interest paid is calculated based on the total balance, including the interest you’ve earned over time. So as each month passes, you are earning interest on an increasingly larger pool of money.

That’s why compounding interest can be such a powerful tool and why you’ll hear many experts encourage folks to save as early and often as they can so that they have more time to enjoy the power of compounding.

Here is how compounding interest works. Let’s say you put $10,000 in savings account that earns an interest rate of 2%. After one year, you will have earned $200. So you’ll start year two with a total balance of $10,200. Now, you’ll earn the same 2% but you’ll be earning it on a higher balance (your original deposit plus $200 in earned interest). At the end of year two, the total interest on your deposit will be $204 — ($10,000+$200) x 2% = $204 — and you’ll be left with a total of $10,404.

Annual Percentage Yield (APY) vs interest

Most deposit accounts where you earn the interest use APY.  It is a number that accurately represents how much you will make from a deposit in a given year, factoring in both the interest rate and compounding period.

If interest is paid on an investment once per year, which means it has an annual compounding period, as shown in the above-mentioned example, the APY and interest rate are the same.

But in reality, most banks offer more frequent compounding periods, which could be quarterly, monthly, weekly or even daily. In these situations, the compounding effect occurs on a much smaller scale but more frequently. As a result, the returns are higher.

Most banks offer an APY, so that account holders don’t have to calculate on their own. But if you are curious to know how an APY is calculated, the Federal Deposit Insurance Corporation (FDIC) provides the mathematical formula on its website.

Read more about the difference between APR and interest rate when it comes to mortgages here.

How to calculate APY

You can use DepositAccount.com’s compound interest calculator to calculate how much return you will eventually get on your investments over certain time periods. But if you’re someone who likes to see how the math works out, we’ll cover the formula as well.

APY = 100*[(1 + (interest rate/compounding cycles)^compounding cycles)) – 1]

Compounding cycles is the number of times a year your interest compounds.

Now if the 2% interest on that investment of $10,000 compounds daily (365 times of a year), at the end of the year, you will earn $202.01 in interest on that deposit. In this case, the APY is 2.0201%.

Here is how we arrived at the result:

APY = 100 * [(1 + (.02/365) ^ 365) – 1]

APY = 2.0201%

The deposit compounds monthly, meaning it has 12 compound cycles:

APY = 100 * [(1 + (.02/12) ^ 12) – 1] = 2.0184%

Blended APY

Blended APY comes into play when there are rate tiers in accounts. That means depending on how much you’ve invested, a portion of your balance earns one interest rate, while another portion earns a different interest rate. A blended APY averages the different interest rates and also factors in compounding.

Some financial institutions reward low balance savers by placing the highest rate with the lowest deposit, but if the balance grows they start using a reverse tier system where they blend the APY as the balance grows, Tumin explained.

These tiered rates are typically applied in money markets, savings and reward checking accounts, Tumin said. There can be more than two rate tiers, which it can make it more complicated to determine the final amount of interest you’ll earn over time.

Banks and credit unions that offer products that apply blended APYs usually list the rate tiers for different ranges of deposits. In this example, the blended APY is neither 1% nor 2%. The exact blended APY is calculated based on how much you have invested.

The formula that you can use to calculate the blended APY is:

Blended APY = (Amount1 * Rate1 + Amount2 * Rate2) / Total Amount

For example, let’s say you open a savings account that gives you 2% APY on your investments below $10,000 and 1% APY on deposits above $10,000.

You have $20,000 to deposit.

So, what we get from the $20,000 is:

Blended APY = ($10,000 * 2% + $10,000 * 1%) / $20,000 = an effective APY of 1.5%

Blended APY vs fixed APY:

Would you be better off picking an account with the blended APY or another account with a fixed APY of 1.5% on your entire balance?

It depends on your total balance.

Let’s say you put $15,000 in that same two-tiered account (2% on your first $10,000; 1% on deposits above $10,000).

Using the same formula from above, your blended APY would be 1.67%, beating a 1.5% APY.

But if you dump $50,000 into this account, your blended APY then would be 1.2%.

In this case, a fixed 1.5% APY would be a better deal for you.

When looking for savings accounts, you should shop around and compare the expected returns based on your initial investment.

Understanding the difference between APY, interest rate and APR

In the family of interest rates, APY has a sister called APR, which stands for annual percentage rate.

APR is often used to describe the interest rate you pay on loans and credit card debt. However, once in a while, you’ll see APR mentioned for deposit accounts, which essentially means a simple interest rate in that context, Tumin said.

When you are shopping for a loan, instead of looking at the interest rate, you should focus on APR, which provides a clearer picture of how much the loan will cost you.

An interest rate is the percentage of a loan amount that it costs to borrow money.

Essentially, APR reflects the amount of interest you pay on the money you borrow from a lender every year, and it also factors in how the interest is applied to your balance and associated fees and other costs. But unlike APY, APR does not take compounding into account.

If a lender charges no additional fees, the loan’s APR and interest rate are identical. But if you have to pay an origination fee for a loan, for example, it will increase the APR on that loan, making it higher than a simple interest rate.

Although lenders often advertise the interest rates, the Federal Truth in Lending Act requires that every lender to disclose the APR, so you can use the APR as a good basis to compare the true costs of loans. However, your monthly payment is calculated based on the interest rate, not APR. Here’s an example that shows how monthly payments are calculated using a loan calculator from LendingTree, the parent company of MagnifyMoney. The fees and other costs, such as discount points and origination fees are often paid at the closing of a loan or will be calculated into your loan balance.

This article contains links to DepositAccounts.com. Like MagnifyMoney, DepositAccounts.com is a subsidiary of LendingTree.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Earning Interest, Eliminating Fees, Reviews

Schwab High Yield Investor Checking Account Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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The Schwab Bank High Yield Investor Checking account offered by Charles Schwab Bank isn’t your average checking account. In fact, it’s a checking account designed exclusively for investors. If you want the convenience of having your idle cash and invested assets all under one roof, this product could be for you.

What is the Schwab Bank High Yield Investor Checking account?

The Schwab Bank High Yield Investor Checking account is an interest-bearing checking account that is linked to your Schwab One brokerage account, making it easy and convenient to invest otherwise idle cash.

This product comes with attractive features that many traditional checking accounts offer — including no minimum balance requirements, no monthly service or ATM fees and a variable interest rate — as well as the unique feature of easy transfers to and from your linked brokerage account. When you open your High Yield Investor Checking account, a Schwab One brokerage account will also be opened for you. The accounts will have separate account numbers, but both can be viewed online with a single login.

Here’s what you can expect to receive upon opening and funding a Schwab High Yield Investor Checking account:

  • 0.03% APY
  • Federal Deposit Insurance Corporation (FDIC) insurance
  • Free transfers to and from your linked brokerage account
  • Schwab Bank Visa Platinum debit card
  • Complimentary checks, deposit slips, mailing labels and pre-addressed, postage-paid envelopes

How is the High Yield Investor Checking account different from other checking accounts?

In most cases, checking accounts do not require you to open another linked account in which funds will flow to and from. The Schwab High Yield Investor Checking account, however, is only available as a linked account with the Schwab One brokerage account.

If you’re in the market for just a checking account to stash the cash you use for your everyday spending needs, opening a brokerage account alongside your checking account can seem like an unnecessary step. The brokerage account’s main function is to trade stocks, options, bonds, mutual funds, ETFs and other financial products.

However, it is worth noting that the Schwab One brokerage account does not have any minimum balance requirements or requirements to fund the account, making it relatively accessible and easy to open.

Schwab Bank High Yield Investor Checking account fees and minimums

The Schwab Bank High Yield Investor Checking account features the following fees and minimums:

Monthly service fee

$0

Minimum balance fee

$0

ATM fee

Unlimited ATM fee rebates

Foreign transaction fee

$0

It’s worth noting that while the Schwab One brokerage account also does not have any minimum balance requirements or monthly maintenance fees, other account fees may apply. For example, trades placed through a broker come with a service charge of $25.

Schwab High Yield Investor Checking account pros and cons

Pros

  • Easy to invest idle cash: By having your checking account linked to your brokerage account, it makes it much more convenient to invest any idle cash.
  • Minimal fees: Schwab’s High Yield Investor Checking account boasts minimal fees compared to other checking accounts, specifically ones offered by other big banks.
  • Unlimited ATM rebates: This is a valuable feature and could save you a significant amount of money over time.

Cons

  • Low interest rate: The account’s 0.03% APY pales in comparison to other high-yield checking accounts, some of which have rates that climb to over 5.00% APY.
  • Unnecessary complexity: The requirement of having a Schwab One brokerage account could be viewed as an added hoop to jump through for those simply looking for a traditional checking account product.
  • Non-sufficient funds fee: Watch out for the account’s non-sufficient funds (NSF) fee of $25, up to $100 maximum per day, if you don’t have enough money in your account to cover a transaction. Still, this is less than the average NSF fee of $30.50.

Who is the Schwab Bank High Yield Investor Checking account good for?

If you’re just looking for a liquid checking account that you can use for your everyday spending needs, the Schwab High Yield Investor Checking account is likely not for you. There are other checking accounts offering much higher interest rates without requiring you to link a brokerage account in order to open the account. Additionally, if your strategy is to let your extra cash sit in the Schwab High Yield Investor Checking account without initiating regular transfers to your Schwab One brokerage account, your money would grow at a considerably faster rate in a high-yield savings account, money market account or CD.

If you already are an investor and have a Schwab One brokerage account — or are looking for a checking account that provides easy and instant transfers to and from your brokerage account — the Schwab High Yield Investor Checking account is certainly worth exploring. It has many of the same, standout features that the best traditional checking accounts have, while also being one of the few checking accounts out there that provides instant access to your invested assets.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Earning Interest, Reviews

Discover Bank CD Rates Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Discover Bank
Discover Bank’s roots stem back to the Discover credit card brand and the Sears-owned Greenwood Trust Company. Over the past 30 years, Discover Bank’s parent, Discover Financial Services, has become one of the largest credit card issuers in the U.S.

Discover Bank offers an array of financial products, including a full menu of certificates of deposit (CDs). If you’re looking for competitive CD rates, Discover Bank is worth a look.

Discover Bank’s CD rates

CD term

Annual Percentage Yield (APY)

3 months

0.35%

6 months

0.65%

9 months

0.70%

12 months

1.75%

18 months

1.75%

24 months

1.75%

30 months

1.75%

3 years

1.80%

4 years

1.80%

5 years

1.80%

7 years

1.80%

10 years

1.80%

How do Discover Bank’s CD rates compare?

While Discover Bank’s CD rates aren’t always the highest available in our listings of the best CDs, they are consistently among the top offers we’ve seen across all terms. That said, you may be able to find a similar or even better rate with a CD that has a lower minimum deposit than Discover Bank’s rather hard-to-swallow $2,500.

There are usually several nationwide banks offering a 12-month CD at an annual percentage yield (APY) that’s higher than Discover Bank’s 12-month CD APY. Some minimum deposit requirements are also lower.

Regarding returns, it’s always a good idea to invest in CDs with the highest APYs possible, but remember to keep your CD investing strategy in mind. For example, if you’re investing in CDs using the ladder strategy, it might be easier to keep everything in one bank since you’ll be switching in and out of CDs frequently.

Discover Bank manages to stand out from its competition with its mobile app and 24/7 U.S.-based customer service. To some people, these conveniences may be worth a few basis points of interest accrued.

What you need to know about Discover Bank’s CDs

Discover Bank provides an open image, and the company makes even its fine print more accessible and easier to understand than other banks do. Consumers may find Discover Bank’s transparency a key asset when investing their wealth. Due to this approach, purchasing CDs through Discover Bank is a rather straightforward process.

How to open a Discover Bank CD

On Discover Bank’s online banking webpage, click on the orange “Open an Account” button near the top right of the page. You can then choose which accounts you’d like to open. Select the certificate of deposit option, then after inputting your details, choose a CD term and enter an initial deposit amount.

You’ll then need to complete the application by providing your name, address, date of birth, phone number, Social Security number, employment status and possibly your driver’s license. Once your application is complete and accepted, you’ll need to fund the account.

How to fund a Discover Bank CD

You’ll need to fund it within 45 days of submitting your application, which you can do in one of three ways:

  • Transfer funds from another bank account over the phone. (You can only do this when you first fund your account.)
  • Transfer funds from another bank via online transfer.
  • Mobile check deposit.
  • Write a check to yourself and send it to the following address:
    • Discover Bank
    • P.O. Box 30417
    • Salt Lake City, UT 84130

The minimum opening deposit amount for each of Discover Bank’s CDs is $2,500. Once you open a CD, you can’t deposit funds into the same CD later, so it’s a good idea to make sure you have all the cash you want to invest before you open the account. Alternatively, you could look into a CD ladder strategy.

Withdrawing funds from a Discover Bank CD

When you want to withdraw money from your CD, the biggest thing to consider is whether that CD has matured or in other words, finished its term.

If your CD hasn’t yet matured, you have two options: You can take your earned interest out penalty-free at any time, or you can withdraw the principal at any time — but you will incur a penalty. Discover Bank’s penalty amount is determined by the original term of your CD:

  • Less than 1 year: three months’ worth of simple interest
  • 1 year to less than 4 years: six months’ worth of simple interest
  • 4 to 5 years: nine months’ worth of simple interest
  • 5 years to less than 7 years: 18 months’ worth of simple interest
  • 7 years or longer: 24 months’ worth of simple interest

If your CD has finished its term, you can withdraw your money penalty-free, allow the CD to renew or roll it into a CD of a different term length (more on that in a bit).

Earning interest on a Discover Bank CD

Your Discover Bank CD will start earning interest on the same business day that you fund the account. The interest will then be added to your account once each month.

When deciding what to do with your interest, you have two options: The default option is to allow it to compound within the CD (meaning you’ll earn interest on that interest amount), or you can have it automatically deposited each month into another Discover Bank account.

What happens once the Discover Bank CD matures?

You’ll get a heads-up notice from Discover Bank about a month before your CD matures so you can decide what to do with the money. You have two main options: Either reinvest it into another CD (of the same term length or a different term length), or withdraw the money from the CD and put it into another account, such as a checking or savings account, or even a CD at a different institution.

If you don’t let Discover Bank know what you want to do with the maturing CD, it will automatically renew in a new CD of the same term length. You have a nine-day grace period after your CD automatically rolls over to make any changes or withdrawals penalty-free.

The bottom line

As far as big-name banks go, Discover Bank offers great CD products. Although the initial investment required seems a bit high, the bank offers exceptional customer service and APYs that make up for a relatively minor inconvenience for many investors.

If you’re the kind of person who likes to keep your finances in one place, Discover Bank has competitive online savings and checking accounts. No matter how long you’re considering investing money in a CD, Discover Bank is worth a look. Even if the bank doesn’t have the best available APYs, it’s usually within several basis points of the top offerings and well above the average.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.