What Is a Purchase APR on a Credit Card?

Understanding the associated costs, particularly the Annual Percentage Rate (APR), is important for managing credit effectively. The APR represents the yearly cost of borrowing money, encompassing the interest rate. This rate can significantly impact the total amount repaid if balances are carried over time.

Defining Purchase APR

The Purchase Annual Percentage Rate (APR) specifically refers to the interest rate applied to new purchases made with a credit card. This rate is typically expressed as an annual percentage, although it is applied to your balance on a monthly or even daily basis. For example, a 19% annual APR would translate to a monthly rate of approximately 1.58% (19% divided by 12 months).

Credit cards may feature either a variable or a fixed Purchase APR. A variable APR can fluctuate based on a benchmark rate, such as the prime rate, meaning your interest costs could change over time. Conversely, a fixed APR generally remains stable, though issuers retain the ability to modify it under certain conditions, such as missed payments.

How Purchase APR is Applied

The application of the Purchase APR depends significantly on whether a cardholder maintains a grace period. A grace period is a timeframe, typically around 21 to 30 days, between the end of a billing cycle and the payment due date. During this period, interest on new purchases is generally not charged if the full statement balance from the previous billing cycle is paid by the due date. Failure to pay the entire balance by the due date usually results in the loss of this grace period, causing interest to accrue from the date of each purchase, rather than the due date.

Interest calculation most commonly utilizes the Average Daily Balance method. This method involves summing the daily balances for the billing cycle and dividing by the number of days in that cycle to determine an average. The daily periodic rate (annual APR divided by 365) is then applied to this average daily balance to calculate the interest charge. Interest can compound daily, meaning that each day’s interest is added to the principal, and the next day’s interest is calculated on the new, slightly higher balance.

Other Credit Card APRs

Beyond the Purchase APR, credit cards often feature several other types of APRs that apply to different transactions.

Cash Advance APR

The Cash Advance APR, for instance, is the interest rate applied when you withdraw cash using your credit card. This rate is typically higher than the Purchase APR and usually carries no grace period, meaning interest begins to accrue immediately from the transaction date. Many cash advances also incur an upfront fee, often ranging from 3% to 5% of the amount borrowed.

Balance Transfer APR

Another common rate is the Balance Transfer APR, which applies when moving debt from one credit card to another. Issuers frequently offer introductory 0% or low Balance Transfer APRs for a promotional period, typically ranging from 12 to 21 months, to attract new customers or consolidate debt. However, a balance transfer usually involves a fee, often 3% to 5% of the transferred amount.

Penalty APR

Lastly, a Penalty APR, also known as a default rate, is a significantly higher interest rate that can be imposed if a cardholder violates the terms of their agreement, such as making late payments, exceeding the credit limit, or having a payment returned. This elevated rate can apply to existing balances and new purchases and often remains in effect for at least six months.