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 rate is applied to any unpaid purchase balances at the end of the billing cycle and does not apply to other interest charges incurred.

Key Takeaways

  • The purchase rate is the interest rate applied to regular purchases made with a credit card.
  • This rate is applied to any unpaid purchase balances at the end of the billing cycle.
  • Purchase rates may be based on a borrower's creditworthiness and credit history.
  • Purchase rates differ from other rates like the balance transfer and cash advance rate.

Understanding Purchase Rates

Financial institutions charge credit card borrowers a purchase rate—also known as a purchase annual purchase rate (APR)—for any regular purchases they make on their Visas, MasterCards, and other 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 if the borrower carries a balance. So, if there's a $100 unpaid balance at the end of the month, the borrower is responsible for paying that amount plus interest in full—or the minimum payment—on the next due date. No interest charge is incurred for borrowers who pay off their balances 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 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%. This rate is often used for the bank’s lowest interest loans and is also associated with the interbank market.

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. Thus, rates on credit cards can range from approximately 14% to 35% depending on the lender and the borrower’s credit profile.

Special Considerations

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 that introductory rates may apply varies by credit card. Introductory rates typically last for approximately 18 months. Once the introductory timeframe 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 from purchases made with the card.

Variable Rates

Many credit cards come with a variable interest rate. This rate is based on the prime rate and can change from time to time. This means the issuer can increase—or drop—the purchase rate at its discretion if credit market rates rise. 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 company normally charges you a different interest rate for that transaction. This is referred to as the balance transfer rate. It may be the same rate as your purchase or higher. This rate is also charged at the end of the month and is generally accompanied by an additional fee called the balance transfer fee—usually ranging from a few dollars to a percentage of the amount based on how much is being transferred.

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 the automated teller machine (ATM) against their credit card. The rate is almost always higher than the purchase rate and can range anywhere between 15% to 30% based on the card. Unlike the regular purchase rate, cash advance interest 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 a percentage of the balance—at the same time.