What is Purchase Annual Percentage Rate ?
921 reads · Last updated: December 5, 2024
A purchase annual percentage rate (APR) is the interest rate that your credit card issuer will charge you on purchases when you carry a balance on your card. In addition to purchase APRs, credit cards can have different APRs for cash advances and balance transfers. They may also have introductory APRs for a certain period after you sign up and penalty APRs for missing payments.
Definition
The Annual Percentage Rate (APR) is the interest rate charged by your credit card issuer on purchases when you carry a balance on your credit card. It is a key indicator of the cost of using a credit card.
Origin
The concept of the APR originated in the mid-20th century with the rise of credit card usage. It was developed to provide consumers with a straightforward way to compare the costs of different credit cards.
Categories and Features
Credit card APRs can be categorized into several types: purchase APR, cash advance APR, and balance transfer APR. The purchase APR applies to everyday spending, the cash advance APR is typically higher and applies to cash withdrawals from the credit card, and the balance transfer APR is used for transferring balances from other credit cards. Each type has specific application scenarios and pros and cons.
Case Studies
Case Study 1: Suppose you use a credit card from a certain bank for shopping with an APR of 15%. If you fail to pay off the balance in full within a month, the unpaid balance will accrue interest at a 15% annual rate. Case Study 2: Another bank offers a 0% purchase APR for 12 months as a promotional offer to attract new customers. Such offers typically revert to the standard rate after the promotional period ends.
Common Issues
Common issues include understanding how to calculate the actual cost of the APR. Many consumers confuse the APR with the monthly interest rate, leading to miscalculations of interest costs. Understanding how APR is calculated can help avoid such misunderstandings.
