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 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 if the borrower pays less than the total statement 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 on that remaining balance—or the minimum payment—on the next due date. No interest charge is incurred for 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 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 margins to the prime rate index, resulting in rates that can range up to 35% or higher for those with no credit or bad credit.

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 range 12-15 months, though some 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 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 plus a margin and can change from time to time if the Federal Reserve raises or lowers the discount 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 $10.

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) 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 can range anywhere between 15% to 30% based on the card. 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 a percentage of the balance or a set dollar amount—at the same time.