A purchase APR is the interest rate that applies to purchases made with a credit card. It tells you how much more expensive the items that you charge to your card will become over the course of a year, if you carry a balance from month to month.
Compare Credit Cards with Low Purchase APRs
You won’t ever have to worry about the purchase APR if you pay your balance in full each month. Credit cards have a grace period between the end of your billing period and your due date during which interest doesn’t apply. Some cards also delay the regular purchase APR by offering an introductory 0% APR for a certain number of months. You can learn about these situations and much more below.
- How a Purchase APR Works
- Credit Card Purchase APR Examples
- How to Find the Purchase APR on a Credit Card
- Factors That Can Affect Your Credit Card’s Purchase APR
- How to Avoid Paying the Purchase APR
- Introductory vs. Regular Credit Card APRs
- Fixed vs. Variable Credit Card Interest Rates
- Types of Interest Rates on Credit Cards
- Credit Card Interest Rate Terminology
- Purchase APR FAQ
How a Purchase APR Works
Let’s start with an example of how a purchase APR works in theory. If you buy something for $1,000 with a credit card that has a purchase APR of 10%, and you pay $500 of it by the due date, the remaining $500 balance would grow to roughly $550 in 12 months if you don’t pay it off before then.
Reality is more complicated than theory, however. Here’s exactly how it works:
- When the purchase APR, also known as your card’s regular APR, is actually being applied to your balance, the amount you owe in interest each day is your regular APR divided by 365, multiplied by your average daily balance over each billing cycle.
- Your average daily balance is the sum of your balance every day of the billing cycle, divided by the number of days in that cycle.
- You only accrue a very small percentage of interest each day, but it adds up fast thanks to daily compounding.
Fortunately, the card’s regular APR doesn’t always kick in right away. You usually have a grace period to pay off what you owe with no interest.
Types of Purchase APRs
Complicating matters a bit is the fact that a single credit card can have multiple purchase APRs. Most common is a card with an introductory purchase APR in addition to a regular purchase APR. For example, 0% APR credit cards offer a 0% purchase APR for a certain number of months after account opening, which is followed by a regular purchase APR of 10%-30%+. Any balance remaining at the end of the 0% period will be subject to the regular APR.
You can learn more how credit card interest is calculated here on WalletHub.
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Credit Card Purchase APR Examples
- 0% Intro Purchase APR: Chase Freedom Unlimited® – 0% for 15 months, with a regular APR of 18.24% - 27.74% (V)
- Low Intro Purchase APR: First Hawaiian Bank Heritage Credit Card – 2.99% for 8 months, with a regular APR of 18% (V)
- Low Regular APR: 13% or lower
- Average Regular Purchase APR: 22.35% (new offers)
- Average Length of 0% Purchase APR: 12 months (new offers)
It’s also worth pointing out that when you get an offer for 0% interest on purchases from a store, it generally includes a feature called deferred interest. This means interest will retroactively apply to your original purchase amount from the purchase date if you don’t bring your balance to zero by the end of the designated 0% period. A purchase APR advertised as 0% “if paid in full by” a certain date is a sign that deferred interest is in play.
How to Find the Purchase APR on a Credit Card
There are several different places where you can find the current purchase APR on your credit card, including:
- Your credit card statement: You can find the purchase APR listed on the paper or electronic statement that your credit card company sends you each month. You’ll usually find it under a section called “Interest Charge Calculation” or something similar.
- Your online account: Log in to your online account with your credit card issuer and click on your card. You should be able to find your APR on the account information page.
- Customer service: Call the number on the back of your card to reach customer service and ask them to tell you what your current APR is.
- Credit card agreement: If you still have the credit card agreement or terms and conditions from when you first got approved for the card, you should be able to see what APR you were approved for there. However, it’s possible your APR could have changed since then, so don’t rely on that 100%.
Factors That Can Affect Your Credit Card’s Purchase APR
Some credit cards may have a single purchase APR for all cardholders. However, most cards have a range with a minimum and maximum APR. The exact credit card APR you get depends on factors like:
- Your credit history
- Your income
- Your age
- Your employment status
- Your housing payments
- The current state of the economy (and what the “prime rate” is for banks’ most creditworthy customers)
- The “margin” that the issuer adds to the prime rate, if you have a card with a variable APR
- Various other factors considered by the issuer
Once you have a card open, its purchase APR can change with fluctuations in the economy if it has a variable interest rate, but it will stay consistent if the card has a fixed interest rate. Either way, irresponsible actions, such as paying late, can trigger a higher penalty APR on purchases.
You also may receive a lower introductory APR on purchases and/or balance transfers for a certain number of months.
How to Avoid Paying the Purchase APR
Credit card debt is extremely expensive, and we have way too much of it right now, so you should avoid carrying a balance from month to month with your credit card unless you have a 0% introductory purchase APR. Here are a couple key things to remember.
If you pay your balance in full every month when your card’s regular APR is in effect, you won’t be charged interest.
You’ll have a grace period between when your monthly statement is generated and when your bill is due. But if you don’t pay in full by the due date, you lose your grace period. As a result, interest will begin to apply to your purchases the day you make them, until you pay in full two months in a row and get your grace period back.
Using the Island Approach can help you save on interest.
The Island Approach means using different credit cards for different types of transactions. You could, for example, use a rewards card for everyday spending and a 0% APR card for a big purchase that will take a while to pay off. That way, your everyday purchases won’t be charged interest, and you can get two cards that are each great in some way rather than one that’s average all-around.
Just try to wait at least six months between card applications to give your score time to recover from the hard credit pull triggered by each application.
Learn more about how to avoid paying interest on credit cards.
Introductory vs. Regular Credit Card APRs
There are a number of reasons why credit card interest rates can change. Some are related to how you manage your account. Others are out of your control. One of the most common scenarios is when an introductory, or promotional, APR ends and a regular APR takes effect. Credit cards with 0% APRs are a prime example. Those 0% rates, whether applicable to purchases or balance transfers, don’t last forever. They give way to a regular APR after a certain period of time.
Introductory Rate / APR
Often referred to as a “teaser rate,” an introductory APR is the low (often 0%) rate that credit card companies advertise to entice new customers. There are a few key things you should know about introductory APRs:
- Intro APRs typically apply to purchases, balance transfers or both. Cash advance APRs are not included in most cases.
- Introductory rates only remain in effect for a predetermined length of time (usually 6-18 months), known as the introductory term or period. When the introductory term concludes, higher regular rates kick in. As a result, a credit card with a low introductory APR is only worthwhile if you can pay off most, if not all, of your balance before regular rates take effect.
- If you are late paying your monthly bill, the credit card company might revoke your introductory APR ahead of schedule and move you to the penalty APR. The average penalty APR among credit card offers right now is 27.29%.
Regular APR
This is another way of referring to the interest rate(s) that apply to purchases, transfers, and cash advances after the introductory APR period is over. If you do not pay your monthly bill on time, the regular APR can switch to a higher default APR.
Credit card rates usually are tied to certain indices, which fluctuate based on changes in the economic climate. We will explain how such rates work in greater detail in the following section.
Fixed vs. Variable Credit Card Interest Rates
You may have heard the terms “fixed” and “variable” used to describe credit card interest rates, or seen the “(V)” noted next to a percentage in a card’s terms. The difference between the two is pretty simple.
Fixed Rate / APR
A fixed rate locks in your APR so it doesn’t fluctuate with changes in the economy. A fixed APR does NOT mean the interest rate on your credit card will never change, however. Misusing your account could result in a penalty APR taking effect. And credit card companies can always raise your rate for future transactions with proper warning (only after the first year, and only with 45-days’ notice).
Variable Rate / APR
A variable rate changes over time, along with the Prime Rate. The Prime Rate is the interest rate banks charge their most creditworthy customers, which are usually large corporations or other banks. The Prime Rate changes as a result of fluctuations in the Federal Funds Rate, which applies to the money banks lend one another.
If the Prime Rate goes up 1% next month, a variable-rate credit card’s APR will also go up by 1%. If the Prime Rate goes down, the rate will go down as well – unless the credit card company has a minimum rate.
These days, most credit cards have variable rates. It’s hard to find a credit card with a fixed rate for an extended period of time.
Types of Interest Rates on Credit Cards
There are several different interest rates you’ll encounter on credit cards. Below, we’ll walk you through the different types and when they are used.
- Purchase APR: The rate by which unpaid purchase amounts grow over time. This rate can either be fixed, meaning it doesn’t fluctuate with the economy, or variable, meaning it can go up or down over time based on changes to the prime rate.
- Balance Transfer APR: The rate by which debt transferred from a loan or line of credit to a credit card will increase in cost until fully repaid.
- Cash Advance APR: The annual cost of carrying a balance from a cash advance, not including the cash advance fee. There is no grace period for cash advances, so interest kicks in right away. Cash APRs tend to be very high – an average of 24.5%, according to WalletHub's Credit Card Landscape Report. And cash advance fees tend to be around 4.01%. Given the high cost, this type of transaction should be reserved for emergencies only.
- Default/Penalty APR: Credit card companies may automatically apply a higher default/penalty APR to future purchases (with 45-days’ notice) when the accountholder doesn’t pay on time. The default APR can only affect existing balances if you’re at least 60 days delinquent.
While credit cards have a number of different interest rates, penalty fees and membership fees are not among them. A credit card’s interest rate and fee structures are entirely separate. However, fees and interest are mixed together when added to your principal balance.
Credit Card Interest Rate Terminology
Part of the confusion surrounding interest rates stems from the fact that so many different terms are thrown around. It makes the topic seem far more complicated than it actually is. For example, you’ll hear the terms “rate,” “interest rate,” “APR,” “annual percentage rate,” and “finance charge” all used to describe the cost of carrying a credit card balance from month to month.
With the exception of “finance charge” (which includes both fees and interest), all of those terms pretty much mean the same exact thing. APR stands for annual percentage rate, and it’s essentially the amount by which your debt will rise in cost over the course of a year, to compensate the bank or credit union for lending you the money.
APR vs. Effective Rate on Credit Card Purchases
It is important to note that credit card APRs are a bit different in theory and in practice. Credit card companies calculate interest on a daily basis, and it compounds over time, meaning the interest you incur one day gets added to your principal balance and that total amount accrues interest the next day. In other words, you owe interest on interest. As a result, your Effective Annual Rate (EAR) will typically end up being at least 10% higher than the APR listed on marketing materials and application forms. That’s often referred to as a “nominal interest rate.”
For example, let’s say that your credit card has a 25% APR and you carry a $100 balance for a year. You’d think that amount would grow to $125 by year’s end. But it would actually rise to about $128.39, making your EAR 28.39%.
The differential between APR and EAR isn’t uniform, either. The higher your APR is, the greater the disparity will be. You can use WalletHub’s free credit card interest calculator to estimate how much you’d save by switching to a credit card with a lower rate.
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