Seven pairs of easily confused money terms

Every area of specialization has its own vocabulary and its own subtleties in word choice. Here are seven pairs of money terms that seem interchangeable at first glance, but are actually slightly different …

APR vs. APY

These two abbreviations are familiar ones from banks and credit card issuers.

Annual percentage rate (APR) gives the yearly cost of a mortgage or other loan, including any interest, insurance, and origination fees, expressed as a percentage. It is the product of the periodic rate and the number of periods per year. APR does not take into account the effects of compounding.

Annual percentage yield (APY) gives the effective interest rate, and is always higher than the corresponding APR, except in the case of annual compounding, in which case APR and APY are equal.

For the mathy types: APY is one plus the periodic rate, raised to the power of the number of periods in a year, and from this value one is subtracted. As an example, for a credit card with an APR of 12%, on which interest accrues monthly, the APY is (1 + 0.01)¹² – 1 x 100% = 12.68%.

Mint variety vs. Mint error

These two numismatic terms are used somewhat interchangeably, but mint errors are actually a specific class of mint varieties; not all varieties are errors.

Mint varieties include any and all variants in the way a specific coin looks coming off the press, regardless of why it looks that way. Dies became worn, and expedients were used to get a little more life out of old dies or to speed the minting process. Some coins were weakly struck, and sometimes a Mint employee might deliberately misstrike a quarter on a dime planchet, or whatever.

These are deliberate, and hence are not mint errors, which should really include only specimens that should have been “normal,” but weren't for some reason. A lot of eBay auctions at one point had “upside-down lettering errors” that were really just varieties; there were as many upside-down lettering coins as right-side-up lettering coins.

Tax deduction vs. Tax credit

Even if tax time is a ways off, or just around the corner, these are two terms that both indicate you can subtract from the amount you owe, which is the good news.

The difference lies in where you subtract.

A tax deduction is used to adjust your gross income (hence the term adjusted gross income), which is the main amount that is used to determine how much tax you owe. The subtraction of a deduction is taken before you calculate your tax.

A tax credit, on the other hand, is subtracted after you calculate your tax. A $1,000 tax deduction will save you $1,000 times your marginal tax rate, whereas a $1,000 tax credit will save you $1,000.

Pre-qualification vs. pre-approval

These two kinds of letters are very important if you're looking to buy a home. Both indicate that the prospective home buyer will be able to secure financing and hence is a good candidate for the sale. The difference is in the extent of the indication.

A pre-qualification letter is the first hoop to jump through and may be based more or less on what the buyer states herself regarding income, job, credit rating, etc. It's better than nothing; if will help you to avoid being screened out.

A pre-approval letter, though,  is given only after a credit check and other verification of appropriate information. If the rest of the loan underwriting of the loan is successful (including an appraisal, title check, etc.) then the loan will be approved; the suitability of the borrower has already been accomplished by the time a pre-approval letter has been issued.

Treasury bill vs. treasury note vs. treasury bond

All are forms of debt issued by the United States Treasury, but the length to maturity — essentially, the term of the loan you're making to the government — maturities are different.

Treasury bills have the shortest maturity (no more than one year) and are bought at a discount to their face value (no less than $1,000), and paid at face value upon maturity.

Treasury notes are intermediate- to long-term (2, 5, or 10 years), pay interest semi-annually, and also have a $1,000 minimum investments.

Treasury bonds have the longest maturity (30 years) and pay interest semi-annually.

(Learn why long-term bond prices fluctuate more than short-term bond prices!)

Penny vs. Cent

Coins representing one-hundredth of a US dollar are called “pennies” more than they're called “cents,” but cent is the correct term.

The coins that Americans love to hate have been officially called cents since the US Mint began producing them in 1793. The obverse (front) began bearing a portrait of Abraham Lincoln in 1909 as a commemoration of the 100th anniversary of his birth. The cents got another redesign in 1959 with the reverse bearing the Lincoln Memorial, and again in 2009 with four separate designs celebrating the 200th anniversary of Lincoln's birth.

Pennies, instead, relate to hundredth parts of the modern British Pound Sterling and others.

Multi-level-marketing business vs. pyramid scheme

These two terms are often thought of as being interchangeable, but they're not.

A multi-level-marketing business, or MLM business, is a legal business model. There is an actual product to be sold at a reasonable price. The business grows by placing a rewards system in place that encourages both sales of the product and recruiting of new salespeople. Avon, Mary Kay, Pampered Chef, and others have a multi-level marketing structure.

A pyramid scheme, on the other hand, is illegal. There is (usually) no real product to be sold (or a minimally useful one) and the primary activity is shuffling money to several levels above you and sending out letters to five of your closest friends. The small minority that enters the pyramid scheme first profit at the expense of the large majority that enters later and this is by design.