The interest charge added monthly to the outstanding balance due on a credit card is the purchase annual percentage rate, or APR.
The APR is an annual percentage rate on a credit card that is applied monthly. For example, if the advertised APR on a credit card is 19%, an interest rate of 1.58% of the outstanding balance will be added monthly to the total amount due.
If the balance is paid in full no later than the period between the end of the billing cycle and your payment due date, often called the grace period, no APR is added.
Key takeaways
- A credit card APR is an annual percentage rate that is applied monthly, meaning the monthly amount charged on the bill is one twelfth of the annual APR.
- Most credit cards have an APR amount attached to them. Different rates for cash advances and purchases are common.
- The APR on a credit card can be changed with a 45-day notice.
Some APRs may be linked to a single credit card; these often include a different and higher APR for cash advances than for purchases.
Understand APR
Some APRs can be attached to a single credit card. These often include a different and higher APR for cash advances than for purchases. (Also, interest on cash advances begins to accrue immediately. Interest on purchases may not begin until the end of the billing cycle.)
Also, credit cards with a low introductory APR, or “interest rate,” are often advertised for a set number of months. When that period expires, a higher APR will kick in. This rate must be disclosed by the lender and is usually quoted as a range, such as 17.74% to 27.24%, or formula, such as the Consumer Price Index plus 14%.
By law, all APR information must be included in a credit card agreement.
APRs are subject to change
However, the APR may not remain as stated in the first agreement. A person’s credit card interest rate can be increased with a 45-day notice. The card issuer must indicate the reason for the increase. It may be due to a late payment or a credit rating downgrade, but it could be a rise in the main national interest rate or a financial downturn at the bank.
However, it’s important to note that credit card companies are prohibited from raising interest rates on new transactions for the first year after you open an account.
Many cards set a default penalty or APR that kicks in if the payment is late or the credit limit is exceeded. APR always applies penalties to future purchases, but may be applied to existing balance if payment is more than 60 days late.
Fixed or Variable APR
The purchase APR can be fixed or variable rate. As stated above, the APR is not really “fixed,” but the card issuer can increase it with a 45-day notice. The variable rate APR is adjusted quarterly or monthly according to certain movements of the index as the main interest rate. The new rate is the prime rate plus a fixed percentage.
The fixed rate APR is not fixed by the reference rate and is more stable than the variable rate. Most issuers reserve the right to change a fixed APR based on market conditions and how the credit card holder uses and maintains, not only with this card but with all obligations recorded by the credit bureaus.
The annual percentage rate (APR) is the expenses that are charged to an account during the year in which they arise. For example, the expenses that may be incurred by an organization that owns a parent company in which it has a 51 percent ownership interest may be treated as expenses incurred during the year of their accrual. If the parent company incurs certain expenses, as a result of its ownership of the parent company, before the balance on its balance sheet, the cost will appear on its profit and loss account. This is commonly known as the cost of capital.
