When you swipe your credit card, you incur a charge that could eventually cost you in interest if you don’t repay on time. The amount you pay in interest is based on your purchase APR, or annual percentage rate.
Purchase APR is just one of many complex terms you’ll see on a credit card agreement, and knowing what it means will set you up to better understand your debt. Here’s everything you need to know about your credit card’s purchase APR – including what it means, how it works and how to get the lowest APR possible.
What Is Purchase APR?
Purchase APR is the interest rate charged on credit card purchases if you carry a balance on the card. APR stands for annual percentage rate, though for credit cards it’s typically based on a rate charged daily. Credit card companies calculate APR by multiplying the daily rate — called a periodic interest rate — by 365 to land on the rate advertised to you. For example, a periodic rate of 0.06457% would compute an APR of 23.6%.
The U.S. Truth in Lending Act requires credit card companies and other lenders to disclose interest rates as an APR to ensure you can compare rates across companies fairly. (Before this requirement, you might not have known whether you were looking at a daily rate, monthly rate or annual rate, making it tough to know how lenders stacked up to each other.)
For a credit card, purchase APR is distinguished from other rates of interest you can incur on the card, including:
- Balance transfer APR: the interest rate charged on the portion of your credit card balance you moved over from a different card.
- Cash advance APR: the interest rate charged on the portion of your credit card balance that you withdrew as cash (i.e. cash advances).
- Penalty APR: an increased interest rate you’re charged for a period if you’re at least 60 days late on making the minimum payment on a credit card bill.
Purchase APR is typically the most prominent interest rate advertised for a credit card. If you only see one interest rate listed, it’s safe to assume that’s the purchase APR.
Is Purchase APR the Same as Interest Rate?
For credit cards, there’s no difference between the purchase APR and the credit card interest rate. A credit card’s APR only includes the interest rate, as opposed to the APR for a mortgage or other installment loan, whose APRs include both interest and fees to give borrowers a more accurate picture of the cost of borrowing.
Credit card APRs don’t include fees even if you incur them, including a balance transfer fee, late fees or an annual fee, because companies wouldn’t be able to predict which fees you’ll incur.
How Does Purchase APR Work?
A credit card issuer sets the purchase APR based on your credit history, and you pay interest on any balance you carry on the card. You only owe interest on a balance you carry past the due date, not on everything you charge to the card.
When you carry a credit card balance past the due date, it charges the periodic interest rate at a set interval — usually daily. That interest charge gets added to your balance, and the rate is charged again the next day on the larger balance (minus anything you’ve repaid). The purchase APR itself isn’t ever used to calculate how much interest you pay; it’s only a number used to help you compare interest rates across credit card companies.
The purchase APR is only applied to the portion of your balance that came from making purchases with your credit card. Any amount of the balance that came from a balance transfer or cash advance gets charged their respective APRs.
Types of Purchase APR
Your credit card interest rate might be one of two types:
- Fixed APR: This rate is set based on your credit score and payment history. As those factors change, a card issuer can change your rate after the first year as long as they give you 45 days’ notice, per the Credit CARD Act of 2009. Fixed rates are rare for credit cards since that law took effect.
- Variable APR: A variable rate is based on your credit score and payment history but is also tied to the prime rate — the base rate banks use to set interest rates, based on the Federal Funds rate. This type of APR can change anytime the prime rate changes, as well as fluctuate with your individual factors. Almost all credit cards have moved to variable rates since 2009.
How to Get a Lower Purchase APR on a Credit Card
Your credit card’s interest rate is determined based on your credit history and your ongoing payment history with the credit card company. The better your credit and payment activity, the lower the APR you’ll be offered.
To determine the potential APR you could get on a credit card, start by getting pre-qualified offers. These don’t guarantee your rate, but they can give you a loose idea of the APR you might be offered if you apply for a credit card.
Not seeing a rate you like? Consider the factors that determine your credit score and where you could make tweaks to raise your score and qualify for a lower APR. For example, you might:
- Pay off outstanding debt or overdue bills that are affecting your payment history.
- Set up payment plans for debt in collections or default to bring payments current.
- Keep your credit utilization between 1% and 30% by paying down your existing credit card balances before spending more on your cards and approaching your credit limit.
- Keeping old cards open, even if you don’t plan to use them anymore, to maintain the age of your credit history.
- Avoid applying for a lot of credit or loans at one time, as each shows up as an application for new credit.
How to Avoid Purchase APR on a Credit Card
To avoid paying interest on your credit card purchases, repay any charges by the end of each month.
You’re only charged interest on credit cards when you carry a balance, which is any amount you don’t pay by the statement due date.
You typically get a credit card bill once a month, and the due date is about a month after that. You only have to make the minimum payment listed on the statement to avoid a late fee or other penalties, but you’ll owe interest on any additional balance that remains. Pay off the balance before the due date, and you won’t owe interest on those purchases.
Frequently Asked Questions (FAQs) About Purchase APR
These are the answers to some of the most commonly asked questions about Purchase ARP to help you understand how credit card interest works.
How Do You Find Your Current APR?
The best place to find your current credit card APR is on your most recent statement, which you can access in your account through the card issuer’s app or website. You can also see your original APR in your credit card agreement, but it might have changed since you signed up.
A 0% APR is usually an introductory APR, a promotion credit card issuers run to get you to sign up for a card. 0% APR means you won’t be charged interest on your balance for a period, typically between six and 24 months. Your regular purchase APR kicks in after the promotional period and applies to any remaining balance. A promotional APR might apply to purchases, balance transfers or both.
Is Purchase APR Charged Monthly?
Purchase APR on credit cards is typically charged daily at a daily periodic rate (equal to the APR divided by 365). You’re only charged interest on a balance carried past the statement due date, and any balance after that point accrues compounding interest daily.
Do I Pay APR if I Pay on Time?
You won’t pay interest on credit card charges as long as you pay your balance in full by the statement due date. But you’ll pay interest on any balance carried past the due date, even if you make the minimum payment on time.
Contributor Dana Miranda is a Certified Educator in Personal Finance® who has written about work and money for publications including Forbes, The New York Times, CNBC, Insider, NextAdvisor and Inc. Magazine.