A credit card’s purchase annual percentage rate (APR) is the interest rate charged when you use that credit card for purchases. However, it is only applied when you carry a balance rather than paying it off by your payment due date each month. Understanding how the purchase APR works can help you navigate your credit card and avoid unnecessary interest charges.
Let’s dig deeper into what a purchase APR is, how it works and why it matters.
What does “purchase APR” mean?
Purchase APR is the interest rate that you pay when you charge standard purchases, such as those made when you’re shopping in store or online, to your credit card and don’t pay off your balance by the credit card payment due date. This yearly cost of borrowing is likely what you think of when you think of a credit card APR.
How does the purchase APR work?
When you purchase something with your credit card, that amount is added to your credit card balance. Making a minimum payment due may keep your account in good standing. However, if you’ve carried a balance on your credit card from the previous month, or you don’t pay your statement balance in full, the purchase you made would be subject to the purchase APR. In that case, interest may accrue daily.
If your credit card has a grace period, interest starts accruing once that period ends. The grace period is the time from the end of your billing cycle to the payment due date.
How to calculate interest using your purchase APR
Credit card interest is often calculated based on your daily average balance. Interest also tends to be compounded daily, which means it can be more complicated to calculate if you make charges throughout your billing cycle.
Here’s what you’d need to do to calculate your credit card interest during a given billing cycle:
- Divide your credit card’s purchase APR by 365 to get your daily periodic rate (the interest rate that’s charged each day)
- Add up your credit card balance for each day in your billing cycle and divide that by the number of days in your billing cycle to get the average daily balance
- Multiply the daily periodic rate by the average daily balance
- Multiply the above figure by the number of days in your billing cycle
Keep in mind that credit card issuers often compound interest, which isn’t accounted for in the steps listed above. When issuers use compounding, your daily interest would be added to the balance, and your next day’s interest would be based on that sum.
When does the purchase APR apply?
Your purchase APR typically only applies to purchases, and only if you don’t pay your statement balance by the due date or you carry a balance over from a previous billing cycle.
Typically, the purchase APR doesn’t apply during your credit card’s grace period as long as you pay the full balance on time. Carrying a balance, however, generally means losing that grace period.
