Effective Annual Rate (EAR)

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%!