What Is Purchase APR and How Does It Work?

Aug 24, 2021

Understanding Purchase APR

Purchase APR, or Annual Percentage Rate, is a term commonly used in the credit card industry. It refers to the annualized cost of borrowing, expressed as a percentage of the outstanding balance on a credit card account. When you make a purchase using your credit card and do not pay off the full balance by the due date, the remaining balance accrues interest at the purchase APR rate.

How Does Purchase APR Work?

Purchase APR is determined by the credit card issuer and can vary depending on factors such as your creditworthiness, credit card type, and current market conditions. Typically, credit card companies offer introductory or promotional APRs for a certain period of time, which tend to be lower than the regular APR. After the promotional period ends, the regular purchase APR will apply to any outstanding balance.

Calculating Purchase APR

To calculate the interest you would owe on a credit card transaction, multiply the outstanding balance by the purchase APR. For example, if you have a balance of $1,000 on your credit card and the purchase APR is 18%, the annual interest charged would be $180. This interest is then divided into monthly payments, resulting in an additional cost on top of your outstanding balance if not paid off in full.

Implications of Purchase APR

Understanding the implications of purchase APR is crucial in managing your credit card debt. High purchase APR rates can quickly accumulate significant interest charges, making it challenging to pay off your balance. It is important to make timely payments and reduce outstanding balances to avoid excessive interest charges.

Minimizing Purchase APR Impact

While you may not have direct control over the purchase APR set by your credit card issuer, there are steps you can take to minimize its impact. Here are a few strategies:

1. Paying off Balances Monthly

By paying off your credit card balances in full each month, you can avoid the accrual of interest entirely. This helps you maintain a healthy credit score and saves you money in interest charges.

2. Seeking Lower APR Credit Cards

Research different credit card options to find cards with lower purchase APR rates. Compare offers and terms to find a credit card that aligns with your financial goals and offers competitive interest rates.

3. Negotiating Lower APR with Card Issuer

If you have a good credit history and a long-standing relationship with your credit card issuer, it may be worth contacting them to negotiate a lower purchase APR. Credit card companies are often willing to work with responsible cardholders to meet their needs.

4. Consider Balance Transfers

If you have a high balance on a credit card with a high purchase APR, you may consider transferring the balance to a card with a lower or 0% APR promotional offer. Be aware of any balance transfer fees and ensure you can pay off the balance before the promotional period ends.

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