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Definition: The actual interest rate when accounting for compounding. It is calculated as follows:
EAR = [1 + (i/n)]^n - 1; where
i = stated annual interest rate
n = number of compounding periods
Advice: The concept of EAR is crucial to understand if you carry a credit card balance. The interest you would have to pay is higher than what the APR indicates. For example, a 10% APR compounded daily results in an EAR of 10.51%. A 30% APR compounded daily would result in an EAR of 35%!
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