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A purchase annual percentage rate (APR) determines the amount of interest that is added to an outstanding credit card balance each month. While the rate is calculated by the year, the interest charge is added monthly to the unpaid balance.
Most credit cards include a purchase APR—annual percentage rate—that is used to calculate the interest on an unpaid credit card balance.
While APR is an annual percentage rate, credit card interest is actually applied monthly by calculating one-twelfth of the APR. For example, a credit card with an APR of 24 percent would have a 2 percent interest charge added monthly to any outstanding balance.
Since APR is only applied to outstanding balances, interest charges can be avoided entirely by paying off the full balance of a credit card by the due date each month.
Read on to learn more about different aspects of APR as well as real-world examples of how APR works.
Important aspects of credit card APR
Although APR is a straightforward calculation, there are a few important details to consider when looking at a credit card’s APR. Keep in mind that credit cards often have multiple APRs and that APR can change over time.
Credit cards often have multiple APRs
When discussing APR, most people refer to a credit card’s “purchase APR,” also referred to as “standard purchase APR.” This is the rate that’s applied to regular purchases, including goods and services.
However, credit cards can do more than just make purchases, so there are several other APRs depending on the activity:
- Cash advance APR: If you use a credit card to receive a cash advance, you’ll pay interest according to the cash advance APR. Often, the rate for cash advances is higher than normal purchases. Also, interest typically begins to accrue immediately rather than after the due date for the monthly bill.
- Balance transfer APR: After you transfer a balance from any line of credit to a credit card, interest will begin to accrue at the rate set by the balance transfer APR. Some credit cards offer a promotional period where transferred balances accrue no interest.
- Penalty APR: When your credit card payments are late—typically by more than 60 days—many credit card companies will institute a higher penalty APR, which can affect both the outstanding balance as well as future purchases on the credit card. Penalty APRs can also be activated for other reasons outlined in a cardholder agreement.
Understanding all of these different kinds of APR makes it easier for you to use credit cards to their fullest while avoiding costly interest payments.
That said, it’s also important to note that APR is not a permanent number, and it can change over time for a variety of reasons.
APR can change over time
The initial APR for purchases and other activities will be laid out in the cardholder agreement you sign when the card is issued. Typical APR ranges from 15 percent to 22 percent, but cards can have higher or lower APR for a variety of reasons. In any case, the initial APR for your credit card may change over time.
Here’s what you need to know about how and why APR changes over time.
- Introductory APR: Some credit cards include a lower introductory or promotional APR for a set period of time, usually between three and 24 months after the credit account is opened. After the introductory period ends, a higher APR takes effect.
- Variable APR: Some credit cards have a variable APR that is tied to economic factors, like the “prime rate,” which is published by the U.S. Federal Reserve. As this number changes, the APR on your credit card will change as well.
- Penalty APR: As noted above, certain actions—like late payments—can lead to a penalty APR that is often significantly higher than the standard APR. The APR often decreases again after six months or more of on-time payments.
- Credit score change: If you have a significant change in your credit score, the credit card company may raise or lower your purchase APR accordingly.
Although APR can change, credit card companies are generally not allowed to change your APR in the first year of your account’s existence. Credit card issuers typically provide notice at least 45 days before increasing a card’s APR. There are a few exceptions to this rule, however, like if your promotional period ends within the first 12 months of your account being opened.
Let’s take a look at some examples of how purchase APR works.
Examples of purchase APR
Looking more closely at different purchase APRs makes it clear that interest rates make a big difference when you carry a balance on your credit card.
Let’s imagine that you purchase a $2,500 exercise bike with your credit card and plan to pay off the balance over the next 21 months.
With a credit card that has a 25 percent APR, you’ll spend $148 each month to pay off the balance for that purchase, and you’ll have paid for more than $600 of interest along the way.
With a credit card that has a 15 percent APR, your monthly payment will be $136 until the balance is paid off, and you’ll accrue $358 of interest as you make payments.
With a credit card that has a promotional 0 percent APR for 12 months (then a 15 percent APR), your monthly payment will be $122, and you’ll only accrue $66 of interest over the course of the 21 months.
Clearly, different purchase APR can make a big difference when it comes to paying off credit card debt.
Getting a card with a low APR may depend on a person’s credit history, if you need help managing your credit profile, Lexington Law Firm provides qualified credit repair services.
Reviewed by Horacio Celaya, Associate Attorney at Lexington Law Firm. Written by Lexington Law.
Horacio Celaya was born in Tucson, Arizona but eventually moved with his family to Mexicali, Baja California, Mexico. Mr. Celaya went on to graduate with Honors from the Autonomous University of Baja California Law School. Mr. Celaya is a graduate of the University of Arizona where he graduated from James E. Rogers College of Law. During law school, Mr. Celaya received his certificate in International Trade Law, completing his thesis on United States foreign direct investment in Latin America. Since graduating from law school, Mr. Celaya has worked in an immigration firm where he helped foreign investors organize their assets in order to apply for investment-based visas. He also has extensive experience in debt settlement negotiations on behalf of clients looking to achieve debt relief. Mr. Celaya is licensed to practice law in New Mexico. He is located in the Phoenix office.
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