Understanding the Difference between Balance Transfer APR and Purchase APR: What You Need to Know*
When it comes to managing your debt, choosing the right credit card can be a daunting task. Two popular options that often come up in discussions are balance transfer APR (Annual Percentage Rate) and purchase APR (Annual Percentage Rate). In this article, we’ll break down the key differences between these two rates, providing you with the financial information and real examples you need to make an informed decision.
Balance Transfer APR: A One-Time Discount*
When you apply for a credit card, you’re offered a promotional rate that’s lower than your regular APR. This is called a balance transfer APR. For example, let’s say you have $5,000 in credit card debt and are approved for a 0% APR balance transfer credit card with a promotional rate of 12 months. During this period, you’ll pay only interest on the transferred amount, which means no interest charges during that time.
When the promotional period ends, your regular APR kicks in, which can be significantly higher than your regular APR. For instance, if your regular APR is 15%, but the balance transfer APR is 12%, you’d face an annual fee of $75 on a $5,000 balance, while paying only interest on that amount.
Purchase APR: The Ongoing Penalty*
On the other hand, purchase APR refers to the rate you’ll be charged if you make a purchase with your credit card. This rate is typically higher than your regular APR and applies to all purchases, not just balance transfers.
Here’s an example: Let’s say you have a $5,000 credit card with a 20% purchase APR. If you charge $1,000 in purchases during the first month of your promotional period, you’ll be charged a $200 fee, plus interest on that amount. After 12 months, your regular APR would kick in, and you’d face an annual fee of $150.
Real-World Examples*
To illustrate these concepts further, let’s consider two scenarios:
Scenario 1: Balance Transfer APR of 0% for 12 months
* You have $5,000 in credit card debt
* You’re approved for a 0% APR balance transfer credit card with a promotional rate of 12 months (e.g., 6.95% – 12 month introductory rate)
* During the 12-month period, you make no purchases and only pay interest on
Leave a Reply