The difference represents one way that the bank recoups the cost of the services it offers, including local branches and ATMs. Inflation can eat up what you earn from a bank. Even at a low rate of inflation, the annual creep in the cost of goods and services outpaces what most banks pay in interest-bearing checking accounts. And at the historical inflation rate of 3.2 percent, little or nothing in the way of real earnings will be left in most savings accounts. Not all interest rates are created equal.
Banks frequently use different methods to calculate interest.
Banks typically quote both figures, but only APYs are calculated in the same way everywhere. The interest rate a bank offers on any given day is typically only guaranteed for seven days. If interest rates fall before the CD expires, the bank is out of luck and must give you the high rate it quoted when you opened the account. If rates climb, however, you're stuck with the lower rate that you agreed to accept until the CD matures. Bank fees take a significant bite out of your budget.