What is purchase APR?

If you have a credit card with a 0% APR, you can spend money without facing any interest charges, right? Not necessarily.

A single credit card can have multiple APRs, one of which is the account’s purchase APR. So even if you have a balance transfer credit card with a 0% introductory APR, for example, you might have to pay interest on your purchases — starting as early as month one.

On the other hand, if you understand how purchase APR and other interest charges work, you can avoid paying credit card interest altogether.

What is purchase APR?

Put simply, the purchase APR on your credit card is the interest rate you’ll be charged on purchases made with the card if you carry a balance from month to month. It’s possible for other types of transactions, such as balance transfers or cash advances, to incur interest at different rates from your purchase APR.

Purchase APRs are usually variable, which means they can change in accordance with an index such as the prime rate. In rare cases the purchase APR on a credit card account is fixed, meaning it won’t change unless the creditor gives you notice — the few credit cards on the market with this feature tend to be issued by credit unions.

To identify the purchase APR on a credit card you’re considering applying for, look at the card’s landing page on the issuer’s website and find the rates and fees document. Note that most cards have an APR range, and an excellent credit score means you’ll be more likely to qualify for a lower APR. For an account you already have open, look at your monthly credit card statement, which you can typically access through your online account and which might come by snail mail as well.

How does purchase APR work?

Purchase APR applies to any balance you carry from purchases on your credit card, regardless of whether you make the transaction online, by phone or in person.

Be aware that credit card interest typically compounds daily — meaning your APR is converted to a daily periodic rate, your balance is assessed interest based on that daily periodic rate each day, and you’re essentially being charged interest on a larger balance every day that goes by.

As an example to show how much credit card interest can cost you in practical terms: If you have a $1,000 balance on a credit card with a 20% APR and you pay $50 toward it per month, it would take more than two years to pay off your debt and you’d end up paying about $204 in interest charges.

Fortunately, most credit cards have a grace period for purchases, which means you can avoid incurring interest by paying off your credit card in full by the payment due date each month.

If you’re carrying a large amount of credit card debt and are struggling to pay it off, consider doing a balance transfer to a card with a 0% intro APR. That could give you breathing room to make payments without incurring interest charges. Just be prepared to pay off the balance in full, before the introductory period ends. If you don’t, whatever balance is remaining will start accruing interest once the promo is over.

Not sure how to get started? Here are the details on how to do a balance transfer.

There are also credit cards with 0% intro APR periods on new purchases, so if you have a big expense coming up, opening a new 0% APR card could be a smart way to finance it over time.

Know that cards with 0% APR offers, whether on balance transfers or purchases, typically require good or better credit to qualify.

What does APR mean?

APR stands for annual percentage rate, and it represents the annual cost of borrowing money, including all account fees and interest charges. With some financial products, APR and interest rate will differ, but for credit cards they’re one and the same.

If you want to compare the cost of using different financial products, like a debt consolidation loan versus a balance transfer credit card or a home equity line of credit, APR gives you a standardized measure to compare them all.

Considering a balance transfer? Here are the pros and cons of balance transfer cards.

According to the Federal Reserve, these were the average APRs for several popular financial products as of May 2023:

• Credit card: 20.68%.
• 24-month personal loan: 11.48%.
• 60-month new car loan: 7.81%.

Other types of APR

If it’s not already confusing enough, each credit card has several different types of APR to keep track of. While purchase APR is the most common type, you might come across these other APRs for certain purchases or credit card activities as well:

• Balance transfer APR: This APR applies to debt you transfer onto a new credit card.
• Cash advance APR: When you borrow cash from your credit card, you will typically have to pay a cash advance fee and interest will start accruing immediately on the amount you withdraw (there is no grace period on cash advances). The cash advance APR is usually higher than the account’s purchase APR, so be prepared that the interest charges could be expensive.
• Introductory APR: Some credit cards have promotional APR offers as low as 0%, which will apply to your balance for a limited period of time after you open the account. The typical introductory period can last anywhere from six to 15 months, sometimes going up to as high as 21 months. This may apply to balance transfers, new purchases or both, so make sure you read the terms carefully before opening a new card.
• Penalty APR: Penalty APR is likely the highest APR you may have to pay, but it only applies if you fail to meet the terms of your credit card agreement. For example, if you make a late payment or pay less than the minimum amount due.

Other terms you may hear in regard to credit cards are “variable APR” and “fixed APR.” Most credit cards have variable APRs, which can fluctuate based on market indexes. Credit cards with fixed APRs are rare, but you may still find them at some credit unions. A fixed APR will remain unchanged throughout market fluctuations such as Fed rate hikes — though with proper advance notice, your issuer can still change your APR.

APR vs. interest rate: what’s the difference?

With some financial products, your APR and your interest rate will differ. For example, when taking out a loan, APR is a more accurate measure of what you’ll actually pay to borrow because it includes not just the interest you’ll pay, but also any fees such as loan origination fees or mortgage insurance. That said, when it comes to credit cards, your APR and your interest rate are the same, and the APR does not include the annual fee or other applicable charges.

Frequently asked questions (FAQs)