What is a 'Purchase Rate'

The purchase rate is the interest rate applied to purchases made with a credit card. The purchase rate only applies to balances that are not paid in full by the end of the billing cycle.

BREAKING DOWN 'Purchase Rate'

Purchase rates are determined by the financial institution issuing credit to the borrower. The purchase rate may begin at 0% if the credit card offers a 0% introductory rate. The length of time that introductory rates may apply varies by credit card. Introductory rates typically last for approximately 18 months. Once the introductory timeframe has expired then the purchase rate will be increased 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 from purchases made with the card.

Banks and financial institutions charge interest on credit card transactions based on the designated purchase rate. The money spent by the cardholder is borrowed from the lender – hence the “credit” in credit card – and the financial institution charges interest for the privilege of being able to borrow money for purchases. Most credit cards have a variable purchase rate which allows the institution to increase the purchase rate at their discretion if credit market rates rise.

Borrower Purchase Rate

Credit card companies charge credit card borrowers varying rates based on their credit profile and credit score. The lowest rate that a bank will charge its borrowers 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%. This rate is often used for the bank’s lowest interest loans and is also associated with interbank lending.

The prime rate provides a basis for credit card companies when making interest rate offers in a credit agreement. The amount of interest charged above the prime rate is known as the spread.

Individuals and businesses looking to obtain a credit card often look for a low purchase rate, as this is the rate that will apply to the majority of transactions that the credit card is used for. Credit card information providers can help potential borrowers to gauge the average interest rate charged by lenders. For credit cards, most banks will add a spread of approximately 10% to the prime rate. Thus, rates on credit cards can range from approximately 14% to 35% depending on the lender and the borrower’s credit profile.

Varying Interest Rates

Credit cards may charge customers other rates beside the purchase rate. The purchase rate is the interest rate that is most commonly associated with credit cards, and which is most understood by cardholders. Cards may also have promotions which allow the cardholder to pay a balance transfer rate on any outstanding balances that are transferred to the card. Cash advance rates will also vary from purchase rates. Cash advance rates are typically a higher rate of interest that is charged on cash advances taken from the card. Credit card companies itemize each type of transaction and classify it according to its appropriate interest rate. These charges are all disclosed in each monthly statement provided for the cardholder.

  1. Secured Credit Card

    A secured credit card is a type of credit card that is backed ...
  2. Credit Card Funding

    Credit card funding is the use of a credit card account to provide ...
  3. Business Credit Card

    A business credit card is a credit card intended for use by a ...
  4. Credit Card Debt

    Credit card debt is a type of unsecured liability which is incurred ...
  5. Go-To Rate

    The interest rate that will come into effect after an introductory ...
  6. Charge Card

    A charge card is a type of electronic payment card that charges ...
Related Articles
  1. Personal Finance

    How Credit Cards Affect Your Credit Rating

    The average American household has four cards, but does that mean more is better?
  2. Personal Finance

    Credit Cards For People With Bad Credit

    Yes, you can get a credit card and start repairing your credit history. But brace yourself for low credit limits, sky-high interest and staggering fees.
  3. Personal Finance

    Purchases You Should Always Make With A Credit Card

    Credit cards aren't always bad possessions to have. There are certain perks associated with using credit cards as we make routine or irregular purchases.
  4. Personal Finance

    Breaking Down Credit Card Fine Print

    Those "perks" offered by credit card companies usually come with strings attached, and these are just a few of them.
  5. Personal Finance

    Why More Millennials Need Credit Cards

    Here's why more Millennials should have credit cards – even though a majority don’t.
  6. Personal Finance

    4 Best Credit Cards for 2018

    If you have good credit, card companies are competing for your business. Here are some of this year's best deals and credit cards you should look at.
  7. Personal Finance

    What happens when your credit card expires?

    Find out why it's a good idea to change and update your credit card once in a while. Learn about other cards that may better suit your needs.
  8. Personal Finance

    5 New Ways Credit Card Companies Are Wooing New Card Holders

    With new laws, credit card companies are forced to get creative to attract new customers.
  9. Personal Finance

    Store Credit Cards: Do The Incentives Pay Off?

    Check out the pros and cons behind store credit cards; they might actually help you save money.
  10. Personal Finance

    The Pros & Cons Of Personal Loans vs. Credit Cards

    One is not like the other. We help you decide where to borrow money from.
  1. What are some examples of common credit card reward program benefits?

    Learn about different benefits available to credit card holders including cash back, air travel miles, introductory rates, ... Read Answer >>
Trading Center