Purchase Annual Percentage Rate (APR)

What Is a Purchase Annual Percentage Rate (APR)?

A purchase annual percentage rate (APR) is the interest rate that you are charged on purchases when you have a balance on your credit card.

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% on the outstanding balance will be added monthly to the total amount owed.

If you pay the balance in full no later than the period between the end of a billing cycle and the date when your payment is due — often referred to as the grace period — then you can avoid paying interest on any purchases that you’ve made.

Understanding Purchase APR

If a consumer pays their credit card bill in full and on time, then they won’t have to pay any interest on whatever purchases they may have made. It’s only when you carry a balance that you will have to pay interest, which is based on your credit card agreement’s stated purchase APR.

A single credit card may have several APRs attached. These often include a different, higher APR for cash advances than for purchases. (In addition, the interest on cash advances begins accumulating immediately. Interest on purchases cannot begin until the end of the billing cycle.)

In addition, credit cards are often advertised with a low introductory APR, or “teaser rate,” for a set number of months. When that period expires, a higher APR will kick in. This rate must be revealed by the lender and is typically stated as a range, such as 17.74% to 27.24%, or a formula, such as the Consumer Price Index plus 14%.

By law, all APR information must be included in a credit card agreement.

A single credit card may have several APRs attached; these often include a different, higher APR for cash advances than for purchases.

APRs can change

The APR may not remain the same as the regular purchase APR stated in the initial agreement. The interest rate on an individual’s credit card can be increased with 45 days’ notice. The card issuer must state a reason for the increase. The reason might be a late payment that you’ve made or a downgrade in your credit rating, but it also can be an increase in the national prime interest rate or a financial setback at the bank.

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 state a penalty or default APR that is triggered if a payment is late or the credit limit is exceeded. The penalty APR always applies to future purchases after such an event, but it also can be applied to the existing balance if the payment is more than 60 days late.

Fixed vs. variable APR

The purchase APR can be a fixed or variable rate. As noted above, an APR is never really “fixed” but can be increased by the card issuer with 45 days’ notice. A variable APR rate is adjusted quarterly or monthly, according to the movements of a particular index such as the prime interest rate. The new rate will be the prime rate plus some set percentage.

A fixed APR is not determined by a reference rate and is more stable than a variable rate. Most issuers reserve the right to change a fixed APR based on market conditions and on how the cardholder uses and maintains credit, not just with this card but with all obligations recorded by the credit agencies.

Average Purchase APR Rates

According to CreditCards.com, the average purchase APR on a credit card for the week of June 16, 2021, was 16.13% — the same as it had been for four weeks. This rate is significantly lower than pre-pandemic rates, with those who have good to excellent credit scoring the best APRs. Cash back cards typically start between 14% and 15%, with top APRs of less than 25%.

Some credit cards offer special promotions on introductory purchase APRs for a limited time, which may range from several months to a year or more. The APR on the interest may be very low or even 0%. Once the promotional period ends, though, the purchase APR goes into effect. If you carry a balance after the promotional period, then you will have to pay monthly interest on the balance based on the purchase APR.