Purchase Annual Percentage Rate vs Other Types of APR

Understanding how different types of APR affect credit card debt.

High interest rates are the primary reason that credit card debt can be so tricky to manage. Misunderstanding how credit card companies apply APR to debt is often a leading cause of debt problems. Credit users need to know the difference between the purchase annual percentage rate and other interest rates on credit cards.

What is purchase annual percentage rate?

Purchase APR adds interest charges quickly

Purchase APR refers specifically to the annual percentage rate applied to regular credit transactions. Anytime you make a purchase with your credit card, the creditor applies purchase APR to that transaction if it’s not paid off within the first billing cycle.

The purchase annual percentage rate that you pay depends on your credit score and your customer history with that creditor. People with high credit scores typically qualify for lower credit card interest rates. Additionally, if you are a loyal customer who always pays on time, you may negotiate for lower interest rates.

In general, most credit cards have a standard purchase annual percentage rate above 15%. If you have reward credit cards that offer cash back or airline miles, the APR will usually be higher. It’s not uncommon to see purchase interest rates above 20% on a reward credit card.

Purchase APR vs other types of APR

Purchase rate vs introductory rate

This is a very important distinction. Creditors apply purchase APR to all standard credit card transactions, UNLESS the card is in the introductory period. Creditors often offer a lower interest rate or 0% APR when you first open a credit card account. This introductory period lasts for period of time – usually between 6 to 18 months. Once the period ends, the standard purchase annual percentage rate goes into effect.

This transition can be problematic for credit users, because you can get hit with high interest charges once it expires. If you have an outstanding balance when the promotional APR period ends, paying the debt off can be tough. At a standard annual percentage rate on most credit cards, roughly 2/3 of every payment goes to accrued interest charges.

If you get a new card, you definitely want to take advantage of the introductory period. The creditor will not apply interest charges to any purchases made during this period. However, you must pay off the balance before the introductory period ends. Otherwise, interest charges can start to pile up.

Purchase APR vs cash advance APR

The cash advance annual percentage rate is the rate applied to cash withdrawals from your credit card. A cash advance is where you take your credit card to an ATM and use it to withdraw money. The APR applied to that transaction is different from the standard APR applied to other transactions; it’s almost always higher. In fact, cash advance APR is usually so high that financial experts recommend to avoid cash advances whenever possible.

If you have to use a cash advance, make sure to pay the balance off on that credit card as quickly as possible. Otherwise, costs on that withdrawal can add up quickly.

Standard rate on purchases vs balance transfer interest rate

Balance transfer APR is the annual percentage rate applied to a balance you transfer from another credit card. Debt transfers are a form of debt consolidation that can make it easier to pay off what you owe. You transfer existing balances from your high APR credit cards to a new credit card. Balance transfer credit cards usually offer 0% APR on balance transfers for a period of months. This means you have a period to pay off the debt without facing accrued interest charges.

If you use a balance transfer, you should always be to pay off the balance before the introductory period ends. Otherwise, you typically pay a higher rate. Even on a balance transfer credit card the APR for balance transfers will typically be higher than the standard APR.

Standard purchase APR vs penalty APR

The final type of APR that you need to worry about is penalty APR. This is the annual percentage rate that your creditor can apply if you are more than 30 days late with a payment. Penalty APR can be double or more the standard annual percentage rate on your credit card. This adds up quickly and makes it extremely difficult to pay off your debt.

Once the creditor applies penalty APR, you must make 6 consecutive payments on time to restore your rate. Then the creditor resets your account to the standard APR for purchases.