Two accounts advertising the same rate can pay different amounts over a year. The difference is how often interest is added to the balance and begins earning interest itself.
Interest on interest is the mechanism
Interest credited to an account joins the principal. From that point it earns at the same rate as everything else, so the base for the next calculation is larger.
The more often this happens, the sooner each portion of interest starts working. Frequency changes the timing rather than the rate.
Over one year the effect is modest at ordinary rates. Over long periods, or at higher rates, it becomes substantial.
The reason it grows rather than accumulating evenly is that each addition enlarges the base for every subsequent calculation. Growth accelerates because the thing being multiplied keeps getting larger.
Nominal and effective rates answer different questions
A nominal rate states the annual rate before accounting for compounding within the year. It is not what the account actually pays unless interest is added once annually.
An effective annual rate incorporates the compounding frequency and states what a balance would actually grow by over a year. It is the comparable figure.
Where providers quote different conventions, comparing nominal rates compares incompatible numbers.
The gap widens as rates rise
At low rates the difference between monthly and annual compounding is very small, which is why it attracted little attention during long periods of low rates.
As rates rise, the amount being compounded grows and so does the divergence. The same frequency difference matters more.
The same logic applies to borrowing, where more frequent compounding raises the true cost above the nominal figure.
Withdrawing interest removes the effect entirely
Interest paid away to another account never joins the balance, so it never compounds. The account then grows linearly rather than exponentially.
This is a legitimate choice where the interest is being used as income, but it changes the nature of the return and should not be compared against a compounding alternative.
Some accounts offer both options at the same rate, which makes the distinction easy to miss.
Why frequency is rarely the deciding factor
The difference between compounding conventions is usually smaller than the difference between competitive and uncompetitive rates. Chasing frequency while ignoring rate is the wrong priority.
It matters most in comparisons that are otherwise close, and in long-horizon calculations where small differences accumulate.
Checking the effective annual figure resolves it in one step, since that number already contains the frequency.