What Does Purchase APR Mean?
Grasp the core interest rate on your credit card. Understand what Purchase APR is and how it affects the cost of your everyday spending.
Credit cards offer a convenient way to manage finances, but understanding the associated costs is important for responsible use. The Annual Percentage Rate (APR) represents the yearly cost of borrowing money on a credit card. It is expressed as a percentage and reflects the interest you will pay if you carry a balance. Credit card APRs can vary, with some being fixed rates that remain constant, while others are variable, meaning they can fluctuate with market rates like the federal prime rate.
Understanding Purchase APR
Purchase APR refers to the interest rate applied to new retail purchases made with a credit card. This rate applies to transactions such as online shopping, in-store purchases, or any other standard acquisition where you use your card. It is the most common and often advertised APR associated with credit cards. While the Purchase APR is an annual rate, the interest it represents is typically calculated on a daily basis.
The Purchase APR becomes relevant when a cardholder does not pay their full statement balance by the due date. If a balance is carried over from one billing cycle to the next, interest charges will begin to accrue on the unpaid amount. This means that if you make only the minimum payment or less than the full outstanding balance, the Purchase APR will be applied to the remaining debt.
How Purchase APR is Calculated
Credit card interest, including Purchase APR, is typically calculated daily based on the average daily balance method. To determine the daily interest, the annual Purchase APR is first converted into a daily periodic rate by dividing it by 365 (or 366 in a leap year). For example, a 20% Purchase APR would translate to a daily periodic rate of approximately 0.0548% (0.20 / 365).
The average daily balance is then calculated by summing the outstanding balance for each day in the billing cycle and dividing that total by the number of days in the cycle. This method accounts for any new purchases, payments, or credits applied throughout the billing period. The daily periodic rate is then multiplied by this average daily balance and the number of days in the billing cycle to arrive at the total interest charged for that period.
A significant aspect of credit card interest is the grace period, which allows cardholders to avoid interest charges on new purchases. This period is typically between 21 and 25 days, extending from the end of a billing cycle to the payment due date. To benefit from this grace period and avoid paying interest on purchases, the entire statement balance must be paid in full by the due date each month. If a cardholder carries a balance from a previous cycle, or fails to pay the current balance in full, interest may begin accruing immediately on new purchases, effectively eliminating the grace period.
Key Credit Card APRs
Credit cards often feature several other types of APRs that apply to different transactions.
Cash Advance APR
The Cash Advance APR is a separate rate applied when you use your credit card to obtain cash, such as from an ATM. This rate is almost always higher than the Purchase APR and typically begins accruing interest immediately, with no grace period. Cash advances often incur additional fees as well, making them a more expensive way to access funds.
Balance Transfer APR
Another type is the Balance Transfer APR, which is applied to debt moved from one credit card to another. Card issuers frequently offer introductory, lower rates, sometimes as low as 0% APR, for balance transfers to attract new customers or consolidate existing debt. However, once this promotional period ends, a higher, regular Balance Transfer APR will apply to any remaining balance.
Penalty APR
A Penalty APR is a higher interest rate that may be imposed if a cardholder violates the credit card’s terms and conditions. Common triggers for a Penalty APR include making late payments (typically 60 days or more past due), having a payment returned due to insufficient funds, or exceeding the credit limit. This elevated rate can be substantially higher than the standard Purchase APR, sometimes reaching up to 29.99%, and may apply to both existing balances and new purchases.