Open a credit card statement and you may find more than one interest rate. That surprises many people. Here is a plain walk through the three you hear about most: purchase APR, cash advance APR, and penalty APR. APR stands for annual percentage rate, which is the yearly cost of borrowing shown as a percentage.
Why one card can carry several APRs
Card issuers often set one rate for purchases and different rates for cash advances, balance transfers, or checks written against the account. The monthly statement must show each category's APR and the balance subject to each rate. That is the first place to look.
Which transactions and fees land in which category is spelled out in the cardholder agreement. That is the contract between you and the issuer. It usually sits on the issuer's website, or you can ask the issuer for a copy.
If you cannot work out how your interest was figured, take two steps. First, match the balances on your statement to the rates in the agreement. Second, read the Consumer Financial Protection Bureau (CFPB) answer on how a bill shows different APRs.
Purchase APR and the grace period
The purchase APR is the rate on new purchases. Many cardholders can skip purchase interest entirely. They do it by paying the full purchase balance before the grace period ends. The grace period is the stretch between the end of a billing cycle and the payment due date.
Balance transfers generally do not get a grace period. Interest may start right away on the moved balance. The National Foundation for Credit Counseling explains the four common APRs and says purchase rates for the vast majority of cards are likely 10% or greater. Lower rates tend to go to people with excellent credit and higher rates to people with weaker credit. Your own rate depends on the issuer and your account, so check your agreement.
Cash advances and their hidden costs
A cash advance is a short-term loan taken against your credit line. The CFPB notes it is generally more expensive than a debit withdrawal. You may pay a fee, interest on top of repayment, and possibly an ATM charge.
The fee may be a flat amount or a percentage of what you take out. The sources I reviewed do not give typical cash advance APRs or fee percentages. So confirm the exact figures in your agreement.
One more detail. Many cards set a cash advance limit below the overall credit limit. An ATM can decline you even when the card shows plenty of available credit. Check that limit before you count on it.
Penalty APRs and rate-increase rules
A penalty APR is a higher rate some issuers may apply after certain events. The material I reviewed did not lay out triggers, amounts, or how long it lasts in readable detail. I will not guess. Read the penalty section of your own agreement.
The general rate-increase rules are clearer. The CFPB explains when a card company can raise your rate:
- Issuers generally must give 45 days' notice before raising the rate on new purchases.
- Issuers generally cannot raise the rate on existing balances, with listed exceptions.
- Generally, the rate on new transactions cannot rise during the first year of the account.
The exceptions include an expired temporary rate that lasted at least six months, a variable rate tied to an index that rose, and a minimum payment not received within 60 days after the due date. That last one is the red flag. Missing a minimum payment by 60 days or more can open the door to a higher rate on balances you already carry.
Questions to ask and how payments are applied
Before you use a card for purchases, cash advances, or transfers, ask these:
- Which transactions and fees go into each APR category?
- Is the rate variable, and which index does it follow?
- Does the issuer give 45 days' notice before a rate increase?
- What is the cash advance limit, and what fees apply?
Also know how payments work. Payment above the minimum generally must go to the balance with the highest interest rate. The issuer decides how the minimum portion is split. On a multi-rate statement, that tells you what your extra dollars are doing.
Disclosure rules sit in the Truth in Lending rules, called Regulation Z, at 12 CFR Part 1026. They cover account-opening disclosures, periodic statements, and how APR is determined. The CFPB hosts the text, including section 1026.60 on card applications and solicitations. Some gaps remain in the sources, such as how a penalty rate is removed and how rates and missed payments may affect credit scores. This article is educational only and is not personal financial, legal, or tax advice.
Please seek a professional. This article is general information, not financial, tax or insurance advice. Please seek a licensed financial, tax or insurance professional about your own situation.
