What Is Regular Purchase APR on a Credit Card?
Learn what regular purchase APR means for your credit card. Understand its role in managing your ongoing account balance.
A credit card offers a revolving line of credit for purchases and daily expenses. When using a credit card, you are borrowing money from the card issuer. If this borrowed amount is not repaid promptly, it can incur interest charges. Understanding how these charges are applied is important for effective financial management.
Understanding Annual Percentage Rate
Annual Percentage Rate, or APR, represents the yearly cost of borrowing money, expressed as a percentage. For credit cards, the APR is the yearly interest rate applied if a balance is carried over from one billing cycle to the next. The “regular purchase APR” refers to the interest rate applied to everyday purchases made with the credit card.
It is important to distinguish the regular purchase APR from other types of APRs that may apply to a credit card:
A cash advance APR applies when you withdraw cash using your credit card and is typically higher than the purchase APR, with interest often accruing immediately without a grace period.
A balance transfer APR applies to debt moved from one credit card to another, sometimes featuring promotional low or 0% rates for an introductory period.
A penalty APR can be applied, usually a significantly higher rate, if specific terms of the cardholder agreement are violated, such as making payments 60 or more days late.
An introductory APR is a temporary low or 0% rate on purchases or balance transfers for new cardholders.
How Regular Purchase APR Works
The application of regular purchase APR involves several factors, including the grace period. A grace period is an interest-free interval, typically ranging from 21 to 25 days, between the end of a billing cycle and the payment due date. If the full outstanding balance is paid by the due date, no interest is charged on new purchases made during that cycle.
If the balance is not paid in full by the due date, interest begins to accrue. This interest is generally charged on the outstanding balance, often starting from the transaction date for new purchases and on the remaining balance from the previous cycle. Credit card issuers commonly 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 by the number of days in the period to find the average daily balance, which is then used to calculate the interest owed.
Impact of Regular Purchase APR on Your Finances
When only minimum payments are made on a credit card balance, a significant portion often goes towards covering the accrued interest. This means a smaller amount is applied to the principal balance, extending the time it takes to pay off the debt. Making only minimum payments can result in paying substantially more over time due to the continued accumulation of interest.
The regular purchase APR has a substantial influence on your personal finances, particularly if a balance is consistently carried. A higher APR translates into greater interest charges on any unpaid balance, increasing the overall cost of items purchased on credit. This can lead to a cycle where more money is spent on interest rather than reducing the principal debt.
Carrying a balance and accruing interest can make debt repayment more challenging. As interest compounds, the total amount owed can grow, making it harder to pay off the original principal amount. This situation can hinder financial progress and lead to prolonged debt.
Paying off the full credit card balance each month is a sound approach to avoid unnecessary costs. By consistently clearing the balance before the due date, you can take full advantage of the grace period and avoid all interest charges on purchases. This practice saves money and helps manage credit card debt effectively.