Understanding Purchase APRs – Your Gateway to Smart Credit Card Management
A purchase annual percentage rate (APR) is the interest rate that your credit card issuer charges on purchases when you don’t fully pay off your balance each month. Besides purchase APRs, credit cards can have different APRs for cash advances and balance transfers. They may also offer introductory APRs for a specified period and penalty APRs for late payments.
Key Takeaways
- A credit card’s APR is an annualized percentage rate applied to unpaid balances monthly. The monthly interest charge is one-twelfth of the annual APR.
- The purchase APR is the interest on purchases made with the card.
- Credit cards often have multiple APRs, commonly different rates for purchases and cash advances.
- Credit card issuers can change APRs, even on “fixed-rate” cards with the required notice.
How Purchase APRs Function
The purchase APR on a credit card is an annualized rate applied monthly. For example, if a credit card APR is 19%, an interest rate of approximately 1.58% will be applied to the outstanding balance each month.
If you pay off your balance in full by the due date, you can avoid interest charges on your purchases. The period between the end of a billing cycle and the payment due date is known as the card’s grace period. Interest is only charged when you carry a balance past the due date.
Credit cards often include several different APRs, such as higher rates for cash advances than for purchases. Unlike purchase interest, cash advances begin accruing interest immediately. Also, introductory (teaser) APRs may be significantly lower than the regular purchase APR, sometimes as low as 0% for a promotional period.
How Purchase APRs Can Change
Your credit card agreement will detail the purchase APR and other associated rates. These rates can change over time for various reasons. For instance, your credit card issuer can change the APR if they give you a 45-day notice and a valid reason, such as a late payment or a reduced credit score. New purchases made with the card are subject to the new rate 14 days after you receive the notice.
However, issuers cannot increase interest rates on new transactions during the first year after opening an account. Additionally, many cards impose a penalty or default APR for events like late payments or exceeding credit limits. This rate applies to future purchases and can be applied to the existing balance if a payment is more than 60 days late.
If you have a variable rate card, your purchase APR may change periodically based on an index (like the prime rate). With such cards, the issuer can adjust the rate quarterly or monthly without prior notice. Your new rate will typically be the prime rate plus a specified percentage, as detailed in your credit card agreement.
What Is a Good APR?
As of mid-2023, the median credit card interest rate was around 23.74%, though rates can vary based on the card type and the cardholder’s creditworthiness. For example, Bank of America credit card APRs range from 17.74% to 26.99%. Often, rewards cards carry higher rates, and the lowest rates are reserved for those with excellent credit scores.
Some credit cards offer low or 0% introductory purchase APRs for a set period. Once this promotional period ends, the card will begin charging the full purchase APR on any remaining balance.
Interest Rate vs. Annual Percentage Rate
For credit cards, the interest rate and annual percentage rate (APR) are essentially identical since the rate must be stated as an APR. For other loans, such as mortgages, the APR also includes additional fees, providing a broader cost measure than the simple interest rate.
Strategies to Secure a Better Purchase APR on a Credit Card
To find a card with a favorable purchase APR, it’s beneficial to shop around and maintain a strong credit score. You can improve your credit score by following reputable steps and keeping it in good shape. Additionally, consider credit cards with low introductory APRs but remember to clear your balance before the promotional low rate ends.
How Balance Transfer Credit Cards Work
Balance transfer credit cards let you move balances from existing cards to a new one, typically with a lower intro interest rate. These cards can save money on interest, though they might charge a fee of 3% to 5% on the transferred amount. Evaluate these costs before proceeding.
The Bottom Line
The purchase APR on your credit card is crucial if you plan not to pay off your full balance each month. APRs can differ widely among credit cards, and some cards offer attractive low or 0% APRs for introductory periods. Choosing the right card and managing your purchases wisely can substantially impact your financial health.
Related Terms: Interest rate, Annual percentage rate, Balance transfer, Credit score, Cash advance.
References
- Chase. “APR and Interest Rate: How Are They Different?”
- Consumer Financial Protection Bureau. “What Is a Grace Period for a Credit Card?”
- Consumer Financial Protection Bureau. “When Can My Credit Card Company Increase My Interest Rate?”
- Office of the Comptroller of the Currency, HelpWithMyBank.gov. “How Must the Bank Notify Me When It Makes a Significant Change in Account Terms on My Credit Card Account?”
- Consumer Financial Protection Bureau. “What Is the Difference Between a Fixed APR and a Variable APR?”
- Investopedia. “Average Credit Card Interest Rates – June 2023”.
