What does purchase APR mean on a credit card?

If you're just entering the world of credit, you may find yourself puzzled by various commonly used acronyms. One of the most crucial is the annual percentage rate. In essence, APR indicates the cost charged by a lender or credit card issuer for borrowing money on a yearly basis.

For installment loans like personal or auto loans, the APR includes both interest and fees charged by the lender. In contrast, for credit cards, the APR only reflects the interest rate and does not account for any potential annual fees.

Continue reading to discover more about purchase APR and its impact on your finances.

Understanding how purchase APRs function

The purchase APR of a credit card refers to the interest rate that is applied to purchases when no other APR takes precedence.

You may encounter several other types of APR. For example, your card could have an introductory APR — a promotional interest rate for a limited time — or a cash advance APR — the rate for withdrawing cash. However, this discussion will center on purchase APR.

If you expect to carry a balance on your credit card, the purchase APR is an important consideration, as it can greatly influence the interest that accrues over time.

If you don't consistently pay off your credit card and let the APR take effect, the interest can accumulate and negatively impact your finances. It's crucial to be aware of the purchase APR on your card to make informed decisions about managing your balance and reducing interest expenses.

What constitutes a good APR?

Assessing whether a credit card's APR is considered good can be subjective. According to the Federal Reserve, the average credit card APR exceeded 20% in 2023, so finding an APR below that threshold could be seen as advantageous.

Numerous credit card options currently feature low APRs. This resource serves as a great starting point for your research and can assist you in identifying credit cards with competitive rates.

How purchase APRs can vary

Purchase APR can be either fixed, meaning it stays the same over time, or variable, which means it can change periodically based on the prime rate that banks use to set overall interest rates.

Knowing whether your purchase APR is fixed or variable is crucial for understanding how your card's interest charges might change over time.

Additionally, be cautious that missing your minimum monthly payment for 60 days or more may result in losing a lower purchase APR. In such instances, your credit card issuer could apply a penalty APR, resulting in increased interest charges. To avoid this scenario, it's important to consistently make your minimum credit card payment on time.

Is APR equivalent to the interest rate?

Keep in mind that the standard purchase APR takes effect when no other interest rates are applied. For example, if your credit card has an introductory interest rate, the standard purchase APR will become relevant once that introductory period ends.

To determine your current purchase APR, you can check your credit card statement or log into your account via your lender's online portal. This will give you the information needed regarding the interest rate on your purchases.

In summary

If you plan to maintain a balance on your credit card, your purchase APR should be a primary focus, as it greatly influences the interest you'll accumulate over time.

To keep your purchase APR as low as possible, choose a credit card that suits your financial situation — and consider following TPG's 10 commandments of credit card rewards to enhance your future earnings.