Setting the Annual Percentage Purchase Rate (APR)

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What is an Annual Percentage Purchase Rate (APR)?

An Annual Purchase Rate (APR) is the interest rate 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, 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 between the end of a billing cycle and the date your payment is due (often referred to as a grace period), you can avoid paying interest on purchases you’ve made. . .

Key points to remember

  • The APR on a credit card is an annualized percentage rate that is applied monthly, that is, the monthly billed amount that appears on the bill is one twelfth of the annual APR.
  • The purchase APR is the interest charge added monthly when you carry a balance on a credit card.
  • Most credit cards have multiple APRs attached. Different rates for cash advances and purchases are common.
  • The APR of a credit card can be changed by the company that issued the credit card with 45 days notice.

Understanding the purchase APR

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

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

Additionally, credit cards are often advertised with a low introductory APR, or “hook rate,” for a set number of months. At the end of this period, a higher APR will come into effect. This rate must be disclosed by the lender and is usually shown 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 contract.

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

APRs may change

The APR may not stay the same as the regular purchase APR indicated in the original agreement. The interest rate on an individual’s credit card can be increased with 45 days notice. The card issuer must justify the increase. The reason could be a late payment you made or a drop in your credit rating, but it could also be an increase in the national prime interest rate or a financial setback to the bank.

However, credit card companies are prohibited from increasing interest rates on new transactions during the first year after opening an account.

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

Fixed vs variable APR

The purchase APR can be at a fixed or variable rate. As stated 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, depending on the movements of a particular index such as the prime interest rate. The new rate will be the prime rate plus a certain percentage.

A fixed APR is not determined by a benchmark rate and is more stable than a variable rate. Most issuers reserve the right to change a fixed APR depending on market conditions and the way the cardholder uses and maintains credit, not only with that card but with all obligations recorded by credit bureaus. credit.

Average APR purchase rate

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 with good to excellent credit rating the best APRs. Cash back cards typically start between 14% and 15%, with higher APRs below 25%.

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


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