The ABCs of Credit Card APRs

Trick question: How many APRs—or annual percentage rates, charged on your balance—does your credit card have? If you said one, then you’re probably just counting the APR for new purchases, and you’re wrong. Most credit cards have four APRs, each for a different type of transaction.

Here’s a quick rundown of the four APRs you’ll likely run into:

Purchase APR

This rate—the most commonly used interest rate—is applied to all purchases you make on your credit card. The purchase APR is the one we use to compare credit cards. Your purchase APR is dependent on your creditworthiness, meaning the higher your credit score, the lower the APR you qualify for.

There’s also a grace period—typically around 25 days—before the interest starts to accumulate. That means you can pay off your balance without ever being charged interest. To do that, pay off your balance in full every month at the end of each billing cycle.

Balance transfer APR

This rate applies to any balances you transferred from another card. Often—but not always—the balance transfer APR is the same as the purchase APR, and is similarly dependent on your credit score.

Cash advance APR

When you use your credit card to get cash, say from an ATM, you will be charged a cash advance APR, which tends to be markedly higher than the APRs for balance transfers or purchase APRs. Cash advances also don’t have a grace period and interest begins accruing immediately after the transaction.

Penalty APR

If 60 days or more pass and you don’t make at least the minimum payment on your credit card, all balances on your account get charged this markedly higher penalty rate. The typical penalty APR is 29.9%, the highest amount that banks are allowed by law to charge. In the last year, some issuers have begun to drop their penalty APRs entirely.

How APRs Affect Your Payments

It’s essential to understand the differences in APRs, because those should affect how you choose to pay down your card balances. When you make a payment, your credit card issuer applies it in a certain order. The minimum payment is typically applied to portion of the balance with the lowest APR. Any leftover amount is then applied to the part of the balance with the highest interest rate and so on.

For instance, say your outstanding credit card balance is $500--$300 is from purchases with an APR of 15% and the remaining $200 is from a cash advance with a 24% APR. Your minimum payment is $50. If you make a $250 payment, $50 will go to the 15% balance, while $250 will pay down the 24% balance. That’s why it’s important to pay more than the minimum payment, so you tackle that part of your balance that is accruing the most interest.

How to Reduce Your APR

If you’re stuck with a too-high APR, you have options. First, you can try consolidating your debt and lowering your overall APR by moving your balance to a balance transfer card with a 0% APR for an introductory period, which will range from six months to 18 months or more. These cards target consumers looking for a way to pay down credit card debt. Remember: Avoid buying anything on your balance transfer card unless you plan to pay it off within a month, and so not incur an interest charge. That’s because the purchase APR on such cards isn’t 0%, but the far-higher market rate for this type of APR. Further, any payments you make will be applied first to the purchase balance rather than to your transferred balance.

If your APR is high because of a late payment, you can ask your bank to re-evaluate your rate after six months of on-time payments and if your credit score has improved. While your APR likely won’t be lowered to its previous level before the delinquency, a reduced rate is still better than a penalty one, especially if you carry balances.