What Is a Purchase APR and How Does It Work?

Understanding credit card terms and rates is important for managing personal finances. One of the most fundamental of these is the Annual Percentage Rate (APR). While APR represents the yearly cost of borrowing, Purchase APR directly impacts everyday credit card usage. This rate is central to how interest is calculated on purchases, making it a relevant factor for anyone carrying a balance.

Defining Purchase APR

The Annual Percentage Rate (APR) is the yearly interest rate applied to outstanding credit card balances. Purchase APR refers to the interest rate charged on new purchases made with a credit card. This rate is expressed as an annualized percentage, indicating the cost of borrowing over a year. Although an annual rate, interest calculations occur daily or monthly. The annual rate is divided by the number of days or months in a year to determine the periodic interest rate.

Application of Purchase APR to Credit Card Balances

The Purchase APR dictates how interest accrues on credit card balances. When a cardholder does not pay their credit card statement balance in full by the due date, interest begins to apply to the unpaid portion of purchases. Credit card companies use the average daily balance method to calculate interest charges. This method involves summing the outstanding balance for each day in the billing period and then dividing that total by the number of days in the period to arrive at an average daily balance.

Once the average daily balance is determined, it is multiplied by the card’s daily periodic rate, which is derived by dividing the Purchase APR by 365 days. This calculation results in the interest charged for that billing cycle. If the interest accrued is not paid, it can be added to the outstanding balance, leading to compounding interest.

Grace Periods and Purchase APR

A grace period is a defined timeframe between the end of a credit card billing cycle and the payment due date. During this period, interest is not charged on new purchases if the cardholder paid their previous statement balance in full by its due date. This mechanism allows cardholders to avoid paying interest on purchases if they consistently pay their entire statement balance on time each month.

If a balance is carried over from a previous billing cycle, or if the full statement balance is not paid by the due date, the grace period may be lost. In such cases, interest can begin to accrue on new purchases from the transaction date, rather than from the end of the grace period. Grace periods apply only to new purchases and do not extend to cash advances or balance transfers. Credit card issuers provide a grace period, lasting at least 21 days from the statement closing date until the payment due date.

Types of Credit Card APRs

Credit cards can feature several different types of APRs, each applying to specific transaction categories. Purchase APR applies to everyday credit card purchases. Other APRs govern different financial activities.

The Cash Advance APR is a rate applied when a cardholder withdraws cash using their credit card. This rate is higher than the Purchase APR, and interest begins accruing immediately without a grace period. The Balance Transfer APR applies to debt moved from one credit card to another. While some cards offer promotional low or 0% Balance Transfer APRs for an introductory period, a standard rate applies afterward. A Penalty APR is a higher interest rate imposed if a cardholder violates credit card agreement terms, such as making a late payment or exceeding a credit limit, and this increased rate can apply to existing balances and new purchases.