The Fine Print of APRs
Whether we like it or not, the whole wide world seems to be filled with fine print. Even a receipt from the donut shop has its own share of tiny script laying out the rules and limitations on your purchase. But while it’s usually perfectly safe to ignore the fine print that comes with your morning bear claw, sometimes the paperwork is just as important as the product.
That’s most definitely the case when it comes to financial products, and credit cards are a key example. Housed in the pages of paperwork that come with your new credit card are many important facts and figures, not the least of which are the all-important interest rates, four little numbers that dictate how much using your new card will really cost you.
The first and most important APR listed on your cardholder agreement is the purchase APR, which is the interest rate charged on new purchases. For the vast majority of credit cards, the purchase APR will likely be 10% or greater. Cards that are aimed at those with excellent credit tend to have the lowest purchase APRs, while the easiest credit cards to get with bad credit will tend to have purchase APRs on the higher end of the spectrum.
Regardless of the size of your purchase APR, you can avoid paying interest fees on new purchases by paying off your entire purchase balance before the end of the grace period, which extends from the time of purchase to the billing due date for that purchase. Those with good to excellent credit may also qualify for introductory 0% APR credit card deals that provide a 0% purchase APR for a limited period of time.
Balance Transfer APR
Another key credit card APR is that charged for balance transfers, which may or may not be the same rate as your purchase APR. A balance transfer occurs when you transfer a credit card balance from one card to another card, generally to obtain a lower interest rate. Since balance transfers don’t qualify for the grace period, you’ll be charged interest on your transferred balance immediately.
While the easiest way to avoid paying balance transfer interest fees is to simply avoid a balance transfer, you could be eliminating a powerful tool in paying down high-interest debt. Instead, those with good to excellent credit can take advantage of introductory 0% APR offers from balance transfer credit cards. The best balance transfer cards offer intro-APR deals that can reduce or even eliminate your balance transfer interest rate for 12 months or more.
Cash Advance APR
Another common credit card APR is the cash advance APR, which applies to any transaction considered to be a cash advance by the issuer. This can mean obtaining cash directly from your credit card through an ATM or bank teller, but may also include other cash-equivalent transactions, like using your credit card to purchase a money order or lottery ticket.
As with balance transfers, cash advances aren’t privy to the grace period to avoid interest. You’ll start being charged interest on a cash advance as soon as the transaction shows up on your statement, so be sure to pay off any cash advance transactions as soon as possible.
The last type of APR likely listed on your cardholder agreement is the penalty APR — and it’s probably significantly higher than its friends. While not every credit card charges a penalty APR, the cards that do will typically charge a rate 5% higher (or more) than your purchase APR.
In most cases, penalty APRs kick in when you make a late credit card payment, at which time the penalty APR takes the place of your purchase APR. Penalty APRs can only be charged on existing balances if you’re more than 60 days late, but can apply to any new purchases made after the late payment regardless of how late it is. The only ways to avoid a penalty APR is to choose a card that doesn’t charge one or to avoid making any late payments.
Similarly, the length of time the penalty APR lasts will also vary by card. For some credit cards, the penalty APR will revert to your default purchase APR after six months or so of on-time payments. For some cards, once the penalty APR is initiated, it becomes your new purchase APR indefinitely.
Byline: Ashley Dull is the Finance Editor at Digital Brands, Inc., where she oversees content published on CardRates.com and BadCredit.org. Ashley works closely with experts and industry leaders in every sector of finance to develop authoritative guides, news and advice articles with regards to audience interest.
*Views expressed are the personal views of the author, and do not necessarily represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.