A purchase annual percentage rate (APR) is the interest rate charged by your credit card issuer for carrying a balance on your card after making purchases. This comprehensive article explains how purchase APRs work, their impact on your finances, and strategies to secure better rates.
What is a purchase annual percentage rate (APR)?
A purchase annual percentage rate (APR) is the interest rate that your credit card issuer will charge you on purchases when you carry a balance on your card. In addition to purchase APRs, credit cards can have different APRs for cash advances and balance transfers. They may also have introductory APRs for a certain period after you sign up and penalty APRs for missing payments.
How purchase APRs work
The purchase APR on a credit card is an annualized percentage rate applied monthly. For instance, if a credit card advertises a 19% APR, the monthly interest rate would be 1.58% of the outstanding balance.
If you pay your balance in full by the due date, you avoid interest on purchases. This period, known as the grace period, occurs between the monthly billing cycle’s end and the payment due date. Interest accrues only when you carry a balance past the due date.
Credit cards often have multiple APRs. Cash advances usually have higher APRs than purchases. Introductory APRs, or teaser rates, can be lower than regular purchase APRs and may even be 0% for a limited period.
How purchase APRs can change
Your credit card agreement outlines the purchase APR and other APRs when you sign up.
APRs can change for various reasons. The issuer can increase rates with 45 days’ notice, usually due to late payments or credit score drops. Any purchases made 14 days after notice are subject to the new rate. However, rates can’t increase on new transactions during the first year after account opening.
Penalty or default APRs may apply for late payments or exceeding credit limits. The penalty APR can apply to future purchases and even the existing balance if payment is over 60 days late.
Variable rate cards allow changes quarterly or monthly, based on an index like the prime rate, without advance notice. Your card agreement specifies how much the APR can change.
Understanding the implications of your credit card’s purchase annual percentage rate (APR) is crucial for managing your finances effectively. Here are the pros and cons:
- Allows you to make purchases and pay later
- Offers a convenient way to build a credit history
- May provide rewards or cashback on purchases
- Grace period allows you to avoid interest if you pay the balance in full
- Accrues interest on unpaid balances, increasing your debt
- High APRs can lead to substantial interest charges
- Missed payments can result in penalty APRs and damage your credit
- Introductory APRs are temporary and can increase after the promotional period
What is a good APR?
As of June 2023, the median credit card interest rate in the Investopedia database was 23.74%, but rates varied widely. Factors like card type and creditworthiness influence rates. The lowest rates go to those with high credit scores.
Introductory purchase APRs are available for a limited period. If you carry a balance after this period, the full purchase APR applies.
Difference between interest rate and APR
For credit cards, interest rates are stated as an annual percentage rate (APR). Other loans may have different rates and APRs due to additional fees.
How to get a better purchase APR
Shopping around for credit cards and having a strong credit score improves your chances of getting a favorable rate. Low introductory rates can also help, but remember to pay before the promotion ends.
How do balance transfer credit cards work?
Balance transfer cards allow transferring a balance to a new card with a low introductory rate. While they save money, they may have transfer fees.
Frequently asked questions
What factors can affect the purchase APR?
Several factors can influence the purchase APR you receive on a credit card. These include your credit score, credit history, the type of credit card, and the prevailing economic conditions. Those with higher credit scores tend to qualify for lower APRs, while riskier borrowers may face higher rates.
Is the purchase APR the only cost to consider?
No, the purchase APR is just one aspect of a credit card’s overall cost. You should also consider annual fees, late payment fees, balance transfer fees, and cash advance fees. Additionally, understanding how the grace period works and whether the card offers rewards can impact the overall value of the card.
Can you negotiate a lower purchase APR?
While it’s not common, some credit card issuers might be willing to negotiate a lower purchase APR, especially if you have a strong credit history and a history of on-time payments. It’s worth contacting the issuer’s customer service to inquire about the possibility, but there’s no guarantee of success.
What should I do if my purchase APR is too high?
If you find that your credit card’s purchase APR is too high, you have a few options. You can try reaching out to the issuer and asking for a lower rate. If that’s not successful, consider transferring your balance to a card with a lower APR or exploring personal loans as an alternative way to manage your debt.
Can I avoid paying purchase APR altogether?
Absolutely. If you consistently pay off your credit card balance in full by the due date, you won’t accrue any purchase APR. This means you can enjoy the benefits of using a credit card without incurring interest charges on your purchases.
Do all credit cards have grace periods?
No, not all credit cards offer grace periods. Some cards start accruing interest on purchases immediately, regardless of whether you pay the balance in full by the due date. It’s essential to understand whether your credit card has a grace period and how it works.
- A purchase APR is the interest rate charged on credit card balances from purchases.
- Credit cards may have multiple APRs for different transactions.
- APRs can change due to various factors, with some restrictions.
- Introductory APRs offer lower rates for a limited time.
- Good credit scores lead to better APRs and terms.
- Consider balance transfer cards for lower rates, with possible fees.