What Is Credit Card APR? What is Purchase APR?

Camino Financial30 Jan 2024
What Is Credit Card APR? What is Purchase APR?
An interest rate stated on a yearly basis is referred to as “annual percentage rate” (APR). It tells you the cost you pay for borrowing money. If we ask, what is credit card APR, we are talking about the interest for the balance carried on your credit card. Why should you want to know the APR on your credit card? This percentage is relevant because the average American maintains a credit card balance of $4,560. At a cumulative level, this is in the region of $1 trillion. Let’s understand why the question of what is credit card APR could be of importance to you. Assume that you carry an average debt of $5,000 on your card, and your bank charges an APR of 12%. That’s $600 in annual interest. Now, consider another scenario. Instead of 12%, your credit card APR is 20%. At this rate, your yearly interest burden jumps to $1,000. You can see that a change in APR can have a significant financial implication. In this post, we’ll go into how APRs work, what is the difference between the interest rate and APR, and how to choose a credit card to minimize your interest costs.

Is Interest Rate and APR the Same in a Credit Card?

The APR you pay your credit card issuer for carrying a balance on your card is usually expressed as an annual rate. Consequently, for credit cards, the APR and the interest is the same. This is also referred to as the “purchase APR.” It’s the interest rate you pay for the things you buy using your credit card. Does having a card that carries a high APR mean that you will have to pay inflated interest costs? Not necessarily. If you pay off your entire credit card statement balance every month, you won’t incur any interest at all. However, the purchase APR isn’t the only APR that you need to worry about. There are others, as well.

What is Credit Card APR and what is Purchase APR? Types of Credit Card APR

When we are looking at what is credit card APR, we should also spend a little time understanding the different types of credit card APRs:
  • Purchase APR: We discussed this term in the previous section. It’s the APR you pay on the balance you carry over to the next billing cycle.
  • Introductory purchase APR: Banks use introductory purchase APRs to attract customers. These interest rates are lower than the usual rates and could even be as low as 0%. For example, the Chase Freedom Unlimited credit card carries an introductory 0% APR for 15 months. But you should track the interest-free period carefully. After it is over, the issuer’s standard APR of 13.99% to 26.74% kicks in.
  • Balance transfer APR: As the name indicates, this APR applies to the sum that you transfer from another card. Watch out for balance transfer fees.
  • Cash advance APR: If you need cash quickly and don’t have money in your bank account, you can use the cash advance facility on your card. Go to an ATM and withdraw funds. But be prepared to pay a hefty price. The Chase Freedom Unlimited credit card charges a Cash Advance APR at a rate that is 21.74% higher than the Prime Rate. You could pay a maximum annual rate of 29.99%.
  • Penalty APR: If you make a late payment or if your bank returns your payment, the credit card issuer could impose its “penalty APR.” This rate could be much higher than your purchase APR. While most card issuers levy a penalty APR in certain circumstances, the new Apple card doesn’t punish customers with this additional interest.
Leather men's open wallet with credit cards

Fixed or Variable APR

When you are considering what is credit card APR, a card with a fixed APR could seem to be a good choice. The name indicates that the interest rate won’t change. However, there are a couple of points that you need to remember. Even though the card issuer’s documents may refer to a “fixed” rate, it is possible that the rate may change. To change the rate, the bank would have to inform you of the proposed change, and you would have the option of canceling the card if you aren’t willing to bear the increase in interest. Here’s another way in which the APR may change even in a “fixed APR” card. A penalty APR could come into effect if you delay payments. There’s one more issue that you need to keep in mind when you are on the topic of what is credit card APR. Most card issuers prefer to provide customers with variable APR cards. A study of 413 credit card issuers found that only 111 provided fixed APR cards. A significant percentage of these were community banks and credit unions. So, if your card carries a variable rate, the applicable interest would be calculated by adding the Prime Rate to the margin charged by the bank:

Calculation of Variable APR

  [caption id="attachment_11961" align="aligncenter" width="699"]Example of what APR means Source: Bank of America[/caption]
IMPORTANT MESSAGE FOR SMALL BUSINESS OWNERS: You can avoid the uncertainty of variable interest rates by opting for a Camino Financial Business Loan. Our rates are fixed for the entire loan term, and you will never have to face rising interest costs because of an increase in the market rate. Camino Financial microloans carry an interest rate ranging from 19% to 34%, and our small business loans are available at 12% to 24.75%.

How is Your APR Calculated?

You should remember that APR refers to an annual interest rate. However, when the bank is calculating the interest that is payable on your credit card balance, they convert the rate into a daily percentage rate. This example will explain how this conversion is done: → APR = 20% → Daily APR = 20 divided by 365 = 0.05479% The balance in your card account at the end of each day is multiplied by 0.05479% to arrive at your daily interest charge. Let’s see how this works. Say, the balance is $5,000 at the end of Day 1. $5,000 multiplied by 0.05479% = $2.74 Your interest cost is $2.74 for Day 1. We can check this figure by multiplying it by 365 (365 multiplied by $2.74 = $1,000, which is 20% of $5,000). At the end of Day 1, you’ll owe the bank $5,002.74. This calculation would be repeated every day until the statement date. Any purchases you make would be added to the balance on the day they are made. The payments you make would reduce the daily balance. You should remember that using a credit card to raise finance for your small business can be an expensive option. A business loan could be far more economical. Woman's hands using credit card on computer with calculator and money on a desk

What Is a Good Credit Card APR?

When you are trying to ascertain what is credit card APR in terms of the interest burden you will need to bear, you should remember that it’s crucial to select a card with the lowest APR. How can you minimize the APR that you will pay? Banks link the rate of interest with your credit score. Cardholders with high credit scores enjoy the lowest rates. Here’s a chart the illustrates the relationship between your credit score and the APR that the card issuer could offer you: [caption id="attachment_11962" align="aligncenter" width="700"]FICO Score chart Source: CardRates.com[/caption] Here are some of the cards that offer the lowest APRs: What if you have a poor credit score? Don’t worry, there are cards for people with bad credit. Entrepreneurs can also opt for credit cards specially designed for small business owners.

What Should you Focus on When Looking for a Credit Card?

With hundreds of options available in the market, it can be difficult to select the best card. An excellent way to begin the process is to think about how you will be using the card. Credit card issuers have developed products that cater to specific markets. For example, JPMorgan Chase has cards targeted at the following segments:
  • Small businesses
  • Travel
  • Balance transfer
  • 0% APR
  • Foreign travel
If you plan to pay only part of your balance every month, you should remember to keep the question of what is credit card APR uppermost in your mind. In this situation, it’s advisable to opt for a card with a low purchase APR. On the other hand, if you plan to pay the entire statement balance regularly, look for a card without any annual fees. There are other considerations, as well. Study the reward point system and the cashback rules. Finally, try and get a card with a large credit limit. Portrait of african american businessman holding mobile and credit card, while resting in the cafe

Tips to Lower Your APR

While on the topic of what is credit card APR, here are some points on how to minimize your interest costs:
  1. Pay your credit card statement in full every billing cycle. If you do this, you won’t need to pay any interest at all.
  2. Choose a card with 0% APR. The longer the promotional period, the better.
  3. Check the APR that you will be charged after the promotional period.
  4. Try and improve your credit score. You will be eligible for the lowest APRs if your FICO score is in the 700+ range or higher.

Camino Financial: Fair APR and Lots of Extra Benefits

Camino Financial offers microloans and small business loans that compare very favorably with credit cards. In addition to our rates being competitive, we have a credit appraisal procedure that is based on our motto, “No business left behind.” Here are some of the features of the loans we offer and our approval process:
  • Amount: $10,000 - $50,000
  • Origination fee: 6.99%
  • Collateral required: Not applicable
  • Credit history: 670
As you can see, besides the annual interest rate and the closing fee, there's no other added fee that you could find in a credit card. There are other benefits, too. Borrowers who make timely payments for nine months or more are eligible for a second loan at a lower rate of interest. Contact our loan specialists today to learn more about how we can help you raise money for your business.        

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