Purchase APR

This is arguably the single most important interest rate on a credit card and could be considered the true cost of a credit card (although if your credit card charges an annual fee, this must also be factored into the overall cost of the card). So why do we suggest that this is the real cost? Well balance transfer offers, along with cashback and other rewards schemes are bonuses from the credit card companies, offered in an attempt to sign up customers in an increasingly competitive market. The more generous these benefits are, the greater the cost of these offers to the credit card company. These costs are passed onto the credit cardholders through the purchase APR charged.

The way that credit card companies make their money is from purchase APR (also known as standard APR), cash advance APR and miscellaneous charges. Cash advances can be avoided on credit cards, simply by not using an ATM and not withdrawing money from a bank teller against your credit card. Most charges can be avoided as long as you stay within your credit card limit and make (at least) your minimum monthly payments on time. Purchase APR can only be avoided if you clear your balance in full every month.

Purchase APR is, in essence, the bread-and-butter income of credit card companies. When balance transfer offers expire, the remaining balance on your credit card will be charged at the purchase APR. Added to this balance, of course, will be the value of purchases made on your credit card.

If you were to purchase a product on your credit card and then pay off the full card balance at the end of the month, there would be no interest applied. If you did not, the purchase APR would apply on the debt accrued from the purchases. This would not be the interest charged on any balance transfer or cash advance monies on the card.

The purchase APR varies widely from one credit card to another, with the lowest rate credit cards. The highest rates can go well over 40% for holders of bad credit credit cards, such as the relatively more reasonable Capital One Classic credit card that charges 29.9%. An average APR in the UK credit market would be around 14%, however this can vary with credit cards and for different individuals with the same credit card, depending upon your credit score (look for the words "variable rate", which means that the credit card company can vary your interest rate against the advertised rate).