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What is purchase APR and how to avoid it

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    When it comes to credit cards, there are different types of annual percentage rates (APR) that will apply to different types of transactions. A common type of APR that you may have heard of is purchase APR. But what is purchase APR, and can you avoid it?

    Purchase APR meaning and how it works

    In short, purchase APR is the amount of interest you pay on purchases made with your credit card when you don’t pay your balance in full by the due date.

    Now, when does purchase APR apply? When you make the minimum payment required and you carry the remaining balance from month to month, you'll usually be charged your purchase APR rate. This rate will be a fixed or variable annual percentage. This means that if you have a fixed 18% purchase APR, for example, you'll pay approximately 1.5% (APR/12 months) on your monthly remaining balance.

    APR on purchases is distinct from other types of APR, such as balance transfer APR or cash advance APR. It’s also important to note that there are two types of APR:

    • Fixed APR: If your card has a fixed rate, it typically won’t change. However, issuers may increase your rate if you have been habitually missing payments or if your credit score recently decreased. If your issuer changes your fixed APR, they are required to provide written notice 45 days before it takes effect.
    • Variable APR: If your card has a variable rate, when you are approved for the card you will be given a range of rates within which your APR may fall into. If this is the case, the rate is influenced by a number of factors, such as the prime rate . The prime rate is set by banks and lenders mainly based on the federal funds rate set by the Fed. If you have a variable APR, your issuer is not required to give you advance notice when you are charged a rate that falls within the range provided. Otherwise, if your issuer changes your variable APR, they are required to provide written notice 45 days before it takes effect.

    How to find your purchase APR

    Issuers are legally required to disclose your purchase APR. If you can’t find it among your own documents, such as your card agreement or your last balance statement, you can go to the issuer’s website, find your specific card and see what the APR is. You may also be able to find it on your credit card issuer’s online banking portal or app. If you’re still unsure about your purchase APR range, you can call the customer service number on the back of your credit card and ask.

    Once you know what your purchase APR is, you may be wondering: How is purchase APR calculate?

    • Because APR is an annual rate, you’ll need to divide your regular purchase APR by 12 to get your monthly rate.
      • For example, if your APR is 25%, your monthly rate would be 25/12 = 2.08%.
    • Banks may also use a daily rate, in which case your APR would be divided by 365 to get your daily rate.
      • If your APR is 25%, your daily rate would be 25/365 = 0.068%.
    • Next, you’ll convert the monthly or daily percentage value into a decimal by dividing it by 100.
      • In this case, it would be 2.08/100 = 0.0208 for the monthly rate, or .068/100 = 0.00068 for the daily rate.
    • Finally, you’ll multiply that monthly or daily rate by your current balance.
      • For example, if your current remaining unpaid balance is $500, then you multiply $500 x 0.0208 to get $10.40. That $10.40 is your purchase interest for that month. If you carry an average daily balance of $500 and use the daily rate, you multiply $500 x 0.00068 to get 0.34. You then multiply that by the number of days in the month. For instance, 0.34 x 31 to get $10.54 as your purchase interest for that month.

    How to avoid purchase APR

    A recommended way to avoid APR on purchases is to not carry a balance from month to month. If you pay your balance in full every month, purchase APR likely won’t apply.

    If you’re signing up for a new credit card, you may be able to apply for one which offers an introductory 0% APR rate that will help you avoid purchase APR for at least a little while, i.e., during the promotional period. During that period, you won’t have to pay purchase APR, even if you’re carrying a balance. However, as soon as that introductory period is up, a standard APR will be applied to new purchases and your leftover balance. Also remember that in all cases you need to pay the minimum payment set by your issuer since if you don't what you may be charged is a penalty APR or fee.

    In summary

    Purchase APR is the interest rate you pay on purchases made with a credit card after making the minimum payment set by your issuer. You may be able to avoid this extra expense by paying off your credit card balance in full each month, or by exploring introductory 0% APR rates offered for a set period of time. It’s also important to know whether you have a variable or fixed APR, as that may affect whether your interest rate may fluctuate over time.

    Purchase APR FAQs

    1. When is purchase APR applied?

    Purchase APR is typically applied to credit card purchases that aren’t paid off in full by a bill’s due date.

    2. Do you pay APR on every purchase?

    As long as you are carrying a balance from month to month, you will most likely be charged interest on the unpaid balance from the previous month.

    3. How to get a lower purchase APR?

    Having a good credit score may help you get a lower interest rate.

    4. Is purchase APR the same as interest rate?

    When it comes to credit cards specifically, an APR and the interest rate are usually the same thing.

    5. What is a good purchase APR?

    The general rule of thumb is that a good purchase APR is one that’s below the national average. A quick online search should be able to tell you where the current national average stands.

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