What is Credit Card APR and its Types, How to Calculate?

Credit cards are by far the best credit products which offer a predetermined limit of money to respective individuals based on their profiles, repayment history, net income, sources of income, etc., for a set period on an interest-free basis. 

Most credit cards offer an interest-free spending duration of 45 days, some provide an interest-free window of 50 days. The spending on credit cards remains interest-free for a certain period of time, but the fancy plastic money does come with a number of charges including joining fees, renewal fees, late payment charges, and annual percentage rate (APR). 

What is APR on a Credit Card?

Annual percentage rate (APR) is nothing but the interest rate charged by the credit card issuer on the balance amount which is left unpaid, or is being carried over to next month. Please note that there is no APR levied if a credit card customer continues to oblige the credit card dues on or before the credit card bill payment due date in entirety. 

Credit cards are a type of unsecured loans bundled into a plastic, alongside which the banks offer lucrative rewards for crossing the monthly, quarterly, yearly milestones. Typically, all banks push you constantly to spend more through a credit card because if you don’t then the card issuing lender will be at losses. 

Minimal spending, nominal monthly bills paid in full, no interest rates, no APR, no EMIs. All of this is a dead business for banks. 

On the other hand, if you spend beyond your repayment capacities, you’ll be left with no other option to convert the spends into EMIs to avoid non-repayment of dues. That’s where the business of banks begins. 

Furthermore, if you’re unable to convert your big spends into EMIs, then the ripple effect kicks in. Your bill generates in full, you either oblige a minimum due amount or any amount lower than the total amount due and carry forward the rest to another month. APR, here it comes. 

The APR on credit cards is irrationally higher, not even close to double the interest rate charged on personal loans. Monthly APR on a credit card outstanding bill ranges from 3 to 4 per cent, which translates into a cumulative APR of 36 to 48 per cent. Yes, 36 to 48 per cent. The range of APR is either pre-decided by the bank at the time of credit card issuance, or it is conveyed to the credit card holder if there is any meaningful change in the applicable APR.

The existing credit score, total outstanding dues, net income, past repayment behaviour, and the transactional relationship with the bank collectively play an important role in deciding the APR.

Types of Credit Card APR

There are three types of APR, namely purchase APR, penalty APR and cash advance APR. Let’s discuss one-by-one. 

• Purchase APR

Purchase APR is the introductory form of APR that is levied on all the spends if the credit card bill is not paid fully on or before the credit card bill payment due date. Spends including shopping, refuelling, dining, travelling, etc., are included in this. 

Supposedly you spend Rs 50,000 in a month, the bank generates a bill of Rs 50,000 for the respective billing cycle, but you’re only able to repay an amount of Rs 30,000. In this case, the APR will be levied on residual amount, i.e., Rs 20,000. Let us assume the APR to be 36%, or 3% a month. 

Therefore, the absolute APR would be Rs 600 (3% of Rs 20,000), plus GST, that brings the total to Rs 708. On top of this, the bank will be at liberty to charge a late payment fee, or carry forward fee which varies from lender to lender. The net additional charges will be added to the bill of Rs 20,000 and further spends in the following month. 

• Penalty APR

Penalty APR is levied if the credit card holder misses the credit card bill payment due date and even the grace period provided by the credit card issuer to clear the dues. Penalty APRs are highest on credit cards as it showcases a default in repayments. Alongside this, it takes a heavy toll on the credit score, the future possibilities of securing a big-ticket credit facility including a car loan, home loan, loan against property, loan against securities, etc. 

A penalty APR of 3.5% per month, or 42% p.a. will be levied if a credit card bill of Rs 50,000 is left unpaid beyond the credit card bill payment deadline and the grace period. An absolute APR of Rs 1,750 will be charged, which results into Rs 2,065 including GST. A missed payment penalty fee will also be included over the penalty APR. 

Any type of APR is damaging to the credit score and financial health of an individual, penalty APR is the worst. If you continue to miss repetitive credit card bills, you will end up paying interest charges over already implied interest, severely damaging. The onset of a debt-trap. 

• Cash Advance APR

Cash Advance APR is applicable on all the cash withdrawals through credit cards at ATMs. All the credit cards come with a specified sub-limits for cash withdrawals out of the total limit extended to an individual. The credit card holders are entitled to withdraw cash up to the prescribed limit in a single billing cycle. 

A withdrawal of Rs 10,000 through a credit card will attract cash advance APR, but it is usually levied on a daily basis. If you withdraw on day 1 and then deposit it back on day 3, the cash advance APR will be applicable on three days. Moreover, the cash advance APR is slightly less than the penalty APR and purchase APR. 

Assuming it to be somewhere close to 2.5% a month, 30% a year. It translates into 0.083% a day. For a withdrawal of Rs 10,000, an absolute cash advance APR of Rs 25 [(0.83% of Rs 10,000)*3] will be there, Rs 29.5 including a GST of 18%. 

How to avoid APR charges?

The best and simplest way to avoid APR is to oblige the credit card bill payment due dates and repay the credit card dues on or before the deadline in totality. That’s it. If you are not timely with the credit card repayments, then you will be automatically subject to APR.