Two accounts advertising the same rate can pay different amounts over a year. The difference comes from how often interest is calculated and credited, which determines when it starts earning on itself.
Compounding means interest joins the principal
Simple interest is calculated on the original deposit throughout. Compound interest is calculated on the deposit plus whatever interest has already been credited.
Each crediting event therefore enlarges the base on which the next calculation is performed, and the effect accumulates over successive periods.
More frequent crediting means the enlargement happens sooner, so the same nominal rate produces a larger total by the end of the year.
The annual percentage yield expresses the difference
The nominal rate describes the rate before compounding is taken into account. The annual percentage yield describes what is actually earned once frequency is included.
Deposit accounts are required to disclose the yield precisely so that accounts with different compounding schedules can be compared on one number.
Comparing quoted nominal rates across institutions is therefore unreliable, while comparing the disclosed yield removes the frequency variable entirely.
Additional frequency has diminishing returns
Moving from annual to monthly compounding produces a visible improvement. Moving from monthly to daily produces a much smaller one at the same rate.
The gain converges towards a mathematical limit as the interval shortens, so continuous compounding is only marginally better than daily.
In practice the rate itself matters far more than the frequency, and an account with a lower rate and daily compounding rarely beats a higher rate compounded monthly.
The effect scales with rate and time, not with balance
Compounding is proportional, so doubling the deposit doubles the interest without changing the relationship between frequency and outcome.
What amplifies the effect is a higher rate, because each crediting event adds more to the base, and a longer horizon, because there are more events.
At low prevailing rates over short periods the difference between compounding schedules is genuinely negligible, which is why it is often ignored.
Withdrawals and crediting dates interact
Many accounts calculate interest daily but credit it monthly, so a balance withdrawn mid-month may still earn accrued interest up to that point.
Others credit only on a set date and pay nothing on funds withdrawn before it, which penalises money that was present for most of the period.
The account disclosure states which method applies, and it matters most for balances that are moved frequently rather than left to accumulate.