What Does Current Purchase APR Mean on Credit Cards?
Understand Current Purchase APR on credit cards. Learn how this specific interest rate works and its implications for your financial health.
Annual Percentage Rate (APR) represents the yearly interest rate applied to a loan or credit line, helping consumers compare borrowing costs. This article focuses on “Current Purchase APR,” which applies to everyday credit card spending.
Defining Current Purchase APR
The Current Purchase APR is the interest rate applied to new retail transactions made with a credit card. This rate becomes effective if a cardholder does not pay their full statement balance by the due date. “Purchase” specifies this rate applies exclusively to goods and services bought with the card.
The word “Current” refers to the standard, ongoing interest rate. This rate applies after any initial promotional periods, such as a 0% introductory offer, have concluded. It is the default interest rate cardholders face on purchases if they carry a balance beyond the grace period.
How Current Purchase APR is Determined
Credit card issuers consider several factors when setting an individual’s Current Purchase APR. Creditworthiness, including credit score and history, is a key determinant. Individuals with higher credit scores are offered lower APRs, reflecting reduced risk. Lower credit scores result in higher interest rates.
Lender internal policies and an applicant’s financial profile, including income, also play a role. Broader economic factors influence credit card APRs. Most credit card rates are variable and tied to an underlying index, such as the U.S. prime rate. If the prime rate increases, variable APRs on credit cards adjust upward.
Calculating Interest with Current Purchase APR
When a credit card balance is not paid in full by the due date, interest charges accrue based on the Current Purchase APR. The annual rate is converted into a daily periodic rate by dividing the APR by 365. This daily rate is then applied to the average daily balance of purchases.
The average daily balance is determined by summing daily balances within a billing cycle and dividing by the number of days in that cycle. Interest charges compound daily, meaning each day’s interest is added to the balance, and subsequent interest is calculated on that new amount.
A grace period allows consumers to avoid interest on new purchases. If the full statement balance is paid by the due date, no interest is charged on new purchases. If any portion of the balance is carried over or not paid by the due date, the grace period may be lost, and interest could be applied from the transaction date.
Other Types of APR
Beyond the Current Purchase APR, credit cards feature other types of Annual Percentage Rates for different transaction categories. An Introductory APR is a temporary, lower interest rate, sometimes 0%, offered for a set period to attract new cardholders. This rate can apply to purchases, balance transfers, or both.
A Balance Transfer APR applies to debt moved from one credit account to another. A standard balance transfer APR will apply after any introductory period. Cash Advance APRs are charged when a cardholder withdraws cash against their credit limit. These rates are higher than purchase APRs and begin accruing interest immediately without a grace period.
A Penalty APR is a higher interest rate applied if certain terms are violated, such as making a payment 60 or more days late. This elevated rate may apply to both existing balances and future purchases.