What Is a Purchase Rate and How Does It Work?
What is a purchase rate? Understand this essential interest rate for credit purchases, its function, and how it differs from other financial rates.
A purchase rate is an interest rate applied to money borrowed for purchases using a credit product. It represents the cost of borrowing funds for acquiring goods or services. This rate indicates the percentage charged on the outstanding balance of such transactions.
Understanding Purchase Rate
The purchase rate defines the annual interest percentage applied to new purchases made with a credit product, becoming active if the balance from those purchases is not paid in full by a specified due date. It is distinct from rates applied to other types of transactions, such as cash advances or balance transfers. The purchase rate is frequently expressed as an Annual Percentage Rate (APR) for purchases. This rate is applied to any unpaid purchase balances at the end of a billing cycle. If a balance remains, the interest charge is added to the principal.
Purchase Rate in Credit Card Accounts
The purchase rate is the interest charged on items bought with a credit card. If the full statement balance is not paid by the due date, interest begins to accrue on the outstanding purchase amount.
A grace period is the time between the end of a billing cycle and the payment due date. During this period, if the previous balance was paid in full, interest is not charged on new purchases. Most credit card issuers offer a grace period, allowing cardholders to avoid interest if they pay their balance completely and on time. However, if the full balance is not paid, the grace period is lost, and interest on purchases may begin to accrue from the transaction date.
Factors Affecting Your Purchase Rate
The purchase rate an individual is offered is influenced by several elements. A primary factor is the applicant’s credit score and credit history. Lenders assess creditworthiness to determine the risk associated with lending, with higher credit scores generally leading to lower interest rates.
Market interest rates also play a role, particularly the prime rate, which is a benchmark used by many commercial banks. Many credit card interest rates are variable, meaning they can change based on fluctuations in the prime rate. If the Federal Reserve adjusts its federal funds rate, this can indirectly influence the prime rate and, consequently, variable purchase rates.
The issuer’s internal policies and the type of credit product also affect the rate. Some credit cards, particularly those with extensive rewards programs, may have higher standard purchase rates to offset the cost of benefits. Additionally, different credit products are designed for varying risk profiles, which impacts the assigned purchase rate.
Purchase Rate Versus Other Interest Rates
It is important to distinguish the purchase rate from other interest rates encountered with credit products. While the purchase rate is often expressed as an Annual Percentage Rate (APR) for purchases, APR is a broader term that can encompass other fees and charges over a year, providing a more complete picture of the total cost of borrowing. The purchase APR specifically applies to purchases, but a credit card can have different APRs for various transaction types.
Introductory or promotional rates are temporary low or 0% purchase rates offered to new cardholders for a set period. Once this promotional period expires, the rate reverts to the standard purchase rate. These rates allow for interest-free payments on purchases if the balance is paid off within the introductory timeframe.
Cash advance rates apply when you withdraw cash using your credit card. These rates are typically higher than purchase rates and often begin accruing interest immediately, without a grace period. Additionally, cash advances usually incur an upfront transaction fee, often 3% to 5% of the amount.
Balance transfer rates are applied when you move debt from one credit card to another. This rate can differ from the purchase rate and may sometimes include a 0% introductory period, similar to promotional purchase rates. However, balance transfers typically involve a fee, commonly 3% to 5% of the transferred amount.