What Is a Purchase Annual Percentage Rate (APR)?
A purchase annual percentage rate (APR) is the interest rate that your credit card issuer will charge you on purchases when you carry a balance on your card. In addition to purchase APRs, credit cards can have different APRs for cash advances and balance transfers. They may also have introductory APRs for a certain period after you sign up and penalty APRs for missing payments.
Key Takeaways
- A credit card's APR is an annualized percentage rate that is applied each month to unpaid balances. The monthly interest amount that appears on the bill is one-twelfth of the annual APR.
- The purchase APR is the interest charged on purchases you have made with the card.
- Most credit cards have several APRs attached. Different rates for purchases and cash advances are common.
- The APRs on a credit card can be changed by the credit card company even if it is a "fixed-rate" card.
How Purchase APRs Work
The APR on a credit card is an annualized percentage rate that is applied monthly. If the advertised APR on a credit card is 19%, for example, then an interest rate of 1.58% will be imposed on the outstanding balance each month.
If you pay the balance in full no later than the due date, you can avoid paying interest on any purchases that you've made. The time between the end of a monthly billing cycle and your card's payment due date is known as the card's grace period. It's only when you carry a balance after the due date that you will have to pay interest on your purchases.
As mentioned, any given credit card may come with several different APRs attached. The APR on cash advances, for example, is typically higher than that for purchases. In addition, the interest on cash advances begins accruing immediately, unlike the interest on purchases. Introductory APRs, sometimes referred to as teaser rates, are lower than the regular purchase APR, sometimes as low as 0% for a period of time.
How Purchase APRs Can Change
When you sign up for a credit card, its purchase APR and other APRs will be shown in your credit card agreement.
Those rates can change over time, for several reasons. For example, the credit card issuer is allowed to change the rate if it gives you 45 days' notice and states a reason for doing so. The reason might be a late payment that you made or a recent drop in your credit score. Any new purchases you make with the card more than 14 days after you've received the advance notice will be subject to the new rate.
However, credit card companies are prohibited from increasing interest rates on new transactions during the first year after an account is opened.
Many cards also impose a penalty or default APR that is triggered if a payment is late or you have exceeded the card's credit limit. The penalty APR always applies to future purchases after such an event, but it can also be applied to the existing balance if a payment is more than 60 days late.
Your purchase APR can also change if your card charges a variable rather than a fixed rate. As noted above, no APR is totally "fixed" since it can be changed by the card issuer with 45 days' notice. With a variable rate card, however, the issuer is free to change it quarterly or monthly, based on the movement of a particular index, such as the prime rate, and isn't required to give you advance notice. Your new rate would be the prime rate (or other benchmark index) plus some set percentage. Your credit card agreement should indicate how much the APR can change over time.
What Is a Good APR?
As of June 2023, the median credit card interest rate for all credit cards in the Investopedia database was 23.74%. However, rates varied widely, even for any given issuer. For example, the APRs on Bank of America credit cards ranged from 17.74% on the low end to 26.99% at the high end. Those differences can be due to a number of factors, including the type of card (for example, rewards cards tend to carry higher interest rates) and the creditworthiness of the individual cardholder. The lowest rates tend to be available to cardholders with the highest credit scores.
Before their full rate kicks in, some cards offer introductory purchase APRs for a limited period, which may range from several months to a year or more. If you carry a balance after the promotional period ends, the card will begin to charge its full purchase APR on that balance.
What's the Difference Between an Interest Rate and an Annual Percentage Rate?
In the case of credit cards, interest rates must be stated as an annual percentage rate, or APR, so they are basically the same thing. With other types of loans (such as mortgages or car loans) the interest rate and APR can be different because the APR will include both the basic interest rate and any additional fees.
How Can You Get a Better Purchase APR on a Credit Card?
When you're looking for a new credit card, it pays to shop around. You'll also improve your odds of getting the best rate if you have a strong credit score. Fortunately, there are a number of things you can do to raise your credit score and keep it up there. Also consider cards with low introductory interest rates. Just remember to pay off your balance before the promotional period ends and the card starts charging its full rate.
How Do Balance Transfer Credit Cards Work?
Balance transfer credit cards allow you to move some or all of your balance on an existing credit card to a new card, typically one with a low introductory interest rate for a certain period of time. Balance transfer cards can save you money in that way, but they typically charge fees equal to a percentage of the amount you're transferring, such as 3% to 5%, so there are costs to weigh.
The Bottom Line
The purchase APR on your credit card is important to consider if you expect to carry a balance on the card rather than paying it off in full each month. APRs can vary widely from card to card, and some cards offer low or even 0% APRs for a limited period of time.
