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First Checking: What Is an APY?

Jun 27, 2017

As a teen weighing your financial options for the first time, it can be hard to determine which checking account best meets your needs. With account minimum balances, annual fees, and overdraft charges, it can seem overwhelming.  APY (Annual Percentage Yield) is a key component of any interest-bearing bank account, so it is important that you understand what it is and how it works.

Understanding interest can get a little confusing. Banks highlight accounts featuring high APYs or APRs, but if you don’t really know what those rates mean in practical terms, how can you choose the best account for you?

We are here to help you understand what APY means as well as the difference between APR and APY so that you can find the right bank account for your needs.

What Is the Difference between APR and APY?

For the most part, APR (Annual Percentage Rate) is used in reference to loans and the amount of money a lender will be charging you for borrowing money from them.  APY (Annual Percentage Yield) is primarily used to describe the interest related to deposit products such as a checking or savings account.

Your APY does take into account compound interest and gives you a better picture of the money you will earn each year. (We will discuss what compound interest is in just a moment.)

How Does the APY Affect My Account?

Plain and simple, a higher APY means that you will earn more interest each year. However, breaking down how that interest is applied to your account balance is a little more complicated.

It all begins with understanding compound interest. Compound interest refers to when:

  • you earn interest from your account
  • you receive that interest into your account
  • the interest is then applied to your original deposit plus the interest you just earned

This means without even adding money to your account, you are getting extra money that you wouldn’t have had otherwise.  An initial deposit of $1,000 would be a great start, but think of how your money would add up if you continued to contribute to your savings account throughout the year instead of just letting your initial deposit sit there!

The Benefits of Interest Rates

Lacking $1,000 to put in your bank account? That’s okay. Any interest earned on your account can help build your savings.  Now imagine if you kept adding your allowance or paychecks to an account that yielded interest. Your money could begin to add up quite quickly.

Interest rates vary significantly for checking accounts. Many checking accounts pay no interest on your deposit.  On average, the national average for an interest checking account is 0.04% APY.[i]  That means that $1,000 deposit would only earn around 40 cents in interest. If your APY was 0.25%, you would earn $2.50 in interest in a year.

Discover First Checking from Bank of Internet USA

Now that you know what a higher APY can do for you, make sure you weigh your options when shopping for your first checking account. You can start building your savings today by earning 0.25% APY through the .

The First Checking account will give you the security of a parental joint account while allowing you to earn interest on your deposits. For further information about First Checking, have your parent contact Bank of Internet USA by telephone at 1-877-541-2634 or by email at .

[i] “Weekly National Rates and Rate Caps” FDIC.

"First Checking: What Is an APY?"

This blog post was published by Bank of Internet USA on and last updated on .