Purchase Rate

What Is a Purchase Rate?

The term purchase rate refers to the interest rate applied to regular purchases made with a credit card. Also called the purchase annual percentage rate (APR), this is the rate most people refer to when they think of a credit card rate. The purchase interest rate is applied to any unpaid purchase balances at the end of the billing cycle and does not apply to other incurred interest charges. It can be thought of as the purchase interest charge.

Understanding Purchase Rates

Financial institutions charge credit card borrowers a purchase rate — also known as a purchase annual percentage rate (APR) — for any regular purchases they make on their Visa, Mastercard, Discover, or American Express credit cards. This is the most common interest rate borrowers pay on their cards. Individuals and businesses looking for a credit card often seek out low purchase rates — the rate that applies to the majority of transactions on a credit card.

The purchase rate is only applied by the credit card issuer to any unpaid balances when the borrower pays less than the total statement balance. If, for example, there's a $100 unpaid balance at the end of the month, the borrower is responsible for paying that amount plus interest on that remaining balance — or the minimum payment — on the next due date. No interest charge is incurred if the borrower pays off their balance in full before the due date.

You can avoid paying the purchase interest on your credit card if you pay off your balance before the due date.

Lenders determine a borrower's purchase rate based on their creditworthiness and credit history. The lowest rate that banks normally charge is the prime rate. This rate typically follows trends in the U.S. Federal Reserve’s federal funds rate. The prime rate is usually the federal funds rate plus approximately 3%.

The prime rate provides a basis for credit card issuers when they make interest rate offers in a credit agreement. The amount of interest charged above the prime rate is known as the spread. Most banks add a spread of approximately 10% to the prime rate, placing average rates in the mid-teen percentage range. However, some issuers add a considerably larger margin to the prime rate index, resulting in rates that can range up to 35% or higher for those with no credit or bad credit.

Annual Percentage Rate (APR)

Annual percentage rate, or APR, is expressed as a percentage and shows how much you would pay to borrow funds over the course of a year. Credit card APR is charged differently from interest on other types of financing. As noted above, as long as you pay your balance in full by your monthly due date, you can typically avoid paying credit card interest altogether.

Credit card APRs vary based on the type of charge incurred. A lender may charge one APR for purchases, another for cash advances, and yet another for balance transfers from another card. Banks also charge high-rate penalty APRs to customers for late payments or for violating other terms of the cardholder agreement. There’s also an introductory APR — a low or 0% APR — which many credit card companies use to entice new customers to sign up for a card.

Types of Purchase Rates

Introductory rates

The purchase rate for a credit card may begin at 0% if the credit card offers a 0% introductory rate. The length of time an introductory rate may apply varies by credit card. Introductory rates typically range from 12 to 15 months, though some card companies offer more generous promotional periods. Once the introductory time frame expires, the purchase rate increases to the card’s go-to rate. The go-to rate is the purchase rate or the standard rate of interest charged on outstanding balances at the end of each payment cycle for purchases made with the card.

Variable rates

Many credit cards come with a variable interest rate. This rate is based on the prime rate plus a margin and can change from time to time if the Federal Reserve raises or lowers the federal funds rate. This means the issuer can increase — or drop — the purchase rate at its discretion if credit market rates change. Variable interest rate conditions are outlined in the lender's terms and conditions.

Purchase Rates vs. Other Credit Card Rates

As noted above, the purchase rate is applied only to regular purchases made with a credit card such as a department or grocery store purchase. Credit cards may also charge customers other rates as well. Along with the regular purchase rate, lenders list all rates in the terms and conditions of the card.

Balance transfer rate

If you transfer a balance from one card to another, the latter's issuing bank sometimes charges you a different interest rate than the purchase rate for that transaction. This is referred to as the balance transfer rate. It may be the same rate as your purchase or higher, or may be 0% for a set period of time in order to incentivize transfers. This rate is also charged at the end of the month. Balance transfers are also typically subject to an additional fee called the balance transfer fee — usually the greater of a percentage of the amount of the balance transferred or a minimum dollar figure fee like $5.

Cash advance rate

Another rate charged by credit card issuers is the cash advance rate. This is applied to any amount a borrower withdraws from an automated teller machine (ATM) or at a bank teller against the cash advance line of their credit card. The rate is almost always higher than the purchase rate and, based on the card, can range anywhere from 15% to 30%.

Unlike the regular purchase rate, cash advance interest has no grace period and accrues the moment a cash advance is taken out by the borrower. Just like a balance transfer, credit card companies also charge a cash advance fee — normally the greater of either a percentage of the balance or a set dollar amount — at the same time.