What is a Purchase Rate
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.