When you obtain a loan, such as a car loan, personal loan, or mortgage, the loan agreement will include a metric known as the APR (annual percentage rate). This percentage reflects the interest you will be required to pay on the loan within one year.
Each time you utilize a credit card, you essentially take out a loan. The bank issuing the credit card covers your purchases, and subsequently, you reimburse the bank. Consequently, credit cards impose a charge referred to as the purchase APR on the funds they lend you.
Here is some important information about the purchase APR, including strategies to avoid paying it.
» MORE: Does the interest rate on your credit card matter?
What does purchase APR mean? As the name implies, purchase APR represents the potential interest amount you might incur on your credit card purchases. Purchase APR is expressed as a percentage, for instance, 18.74% as an arbitrary example.
Unlike other forms of borrowing, the term “purchase APR” used in relation to credit cards carries the same meaning as “interest rate.”
It is important to note that purchase APR is distinct from other types of APRs that credit cards may impose, including:
- Balance transfer APR
- Cash advance APR
- Penalty APR
These APRs for specific credit card transactions can be either lower or higher than the ongoing purchase APR of the card.
How can I determine my purchase APR? Credit card companies are legally obligated to disclose the purchase APR associated with each credit card. The website of every credit card provides a link to the respective cardholder agreement document. The first page typically contains a chart called a Schumer box, which displays the card’s purchase APR in the top row. The APR may be a fixed number, like 29.90%, or it may be presented as a range, such as 16.99%-27.99%. The latter indicates that your card has a variable purchase APR, which fluctuates based on factors like the prime rate. (More on that in the next section.)
You can also find the purchase APR by logging into your account on the card’s website or through the mobile app. Additionally, it is included on your credit card’s monthly statements.
How can I secure a low purchase APR? Several factors influence the purchase APR, some of which are within your control while others are not. Factors beyond your influence include the prime rate, which is influenced by Federal Reserve policy. Many card issuers base a credit card’s purchase APR on the prevailing prime rate.
However, you can have some influence over your purchase APR. Here are a few measures you can take to obtain a favorable APR:
- Enhance your credit score: In general, issuers offer lower purchase APRs to cardholders with higher credit scores. A high score often indicates a history of consistently paying credit card bills in full and on time, which assures the issuer of your ability to repay. Review our tips on how to increase your credit score by up to 100 points.
- Acquire a card with an introductory 0% purchase APR period: Some issuers provide credit cards with promotional periods of 0% APR to entice applicants. Throughout the promotional period, cardholders do not incur interest charges on their purchases. These promotional periods can be quite generous, sometimes exempting interest for a year or longer. Consider utilizing a card with a low or 0% APR promotion to finance significant purchases, such as home repairs or new appliances. If you pay off the purchase amount before the promotional period ends, you will not pay any interest. Even if you don’t pay it off entirely, you will only owe interest on the remaining balance. However, note that the best 0% APR credit cards typically require good to excellent credit, typically defined as a FICO score of 690 or higher.
- Request a lower purchase APR from the issuer: It is worth trying to negotiate with the issuer for a lower purchase APR. While there is no guarantee of success, it doesn’t hurt to make the request.» LEARN: How to negotiate a lower APR on your credit cardHow can I avoid paying the purchase APR? As long as you pay your credit card bill in full by the due date, you will not be charged any interest.
Of course, there may be situations where you are unable to make your credit card payments in full. If you take a proactive approach and work with the issuer, you may be able to avoid paying the full purchase APR, at least for a billing cycle or two.
