What Is a Credit Card Purchase Rate?
Demystify your credit card purchase rate. Learn how it impacts your spending and interest charges to manage your credit effectively.
A credit card purchase rate represents the cost of borrowing money for purchases made with your credit card. Understanding this rate is fundamental as it directly impacts the total amount owed if a balance is carried over time.
The Nature of the Purchase Rate
The credit card purchase rate is typically expressed as an Annual Percentage Rate, or APR, which signifies the yearly cost of borrowing. This rate is applied to outstanding balances resulting from purchases made with the card.
Some credit cards feature a fixed purchase rate, meaning the APR remains constant throughout the life of the account unless specific conditions outlined in the cardholder agreement are met, such as a change in terms with proper notice. Other credit cards utilize a variable purchase rate, which can change over time. These rates are often tied to an independent economic index, such as the prime rate, and fluctuate as that index changes.
A grace period is the time between the end of a billing cycle and the payment due date. If the entire statement balance is paid in full by the due date, interest is generally not charged on new purchases.
Calculating Purchase Interest
When a credit card balance is not paid in full by the due date, or if the grace period does not apply, interest charges begin to accrue on the outstanding balance. Credit card issuers most commonly use the “average daily balance” method to calculate interest. This method involves summing the outstanding balance for each day in the billing cycle and then dividing that sum by the number of days in the cycle to arrive at an average daily balance.
To apply the interest, the annual percentage rate (APR) is converted into a daily periodic rate. This is typically done by dividing the APR by 365, or sometimes 360, depending on the cardholder agreement. The daily periodic rate is then multiplied by the average daily balance, and that result is multiplied by the number of days in the billing cycle. This calculation determines the total interest charge added to the next statement.
Important Purchase Rate Considerations
Credit card offers often include introductory or promotional purchase rates, such as a 0% APR for a specified period. These rates are temporary and are designed to attract new cardholders or encourage specific spending behaviors. Once the promotional period expires, the purchase rate reverts to the standard variable or fixed APR outlined in the cardholder agreement.
Some credit cards may also impose a minimum interest charge. This means that even if the calculated interest on a small outstanding balance is very low, the issuer will charge a predetermined minimum amount, which could be a few dollars.