What Is the Purchase Rate on a Credit Card?

Credit cards offer a revolving line of credit for purchases. This borrowed money must be repaid, often with interest if the balance is not settled in full. Understanding the interest rates associated with credit cards is important for managing personal finances. For credit cards, the interest rate is commonly expressed as an Annual Percentage Rate (APR).

Understanding the Purchase Rate

The purchase rate on a credit card refers to the Annual Percentage Rate (APR) applied to new purchases. This rate is distinct from other rates, such as those for cash advances or balance transfers, which often carry different APRs. The purchase APR applies if you do not pay your credit card balance in full by the due date.

A grace period is a time when interest is not charged on new purchases if the cardholder pays the entire statement balance by the due date. Grace periods typically last at least 21 days from the end of the billing cycle to the payment due date. To benefit, the full balance from the previous billing cycle must have been paid. If any balance is carried over, interest may be charged on new purchases from the transaction date, and the grace period may be lost.

How Purchase Rate Interest is Calculated

Credit card interest, including the purchase rate, is calculated using the average daily balance method. This involves determining the card’s outstanding balance for each day within a billing period. Daily balances are summed and divided by the number of days in the billing cycle to arrive at the average daily balance. A billing cycle usually spans between 28 and 31 days.

To calculate the interest charge, the average daily balance is multiplied by the daily periodic rate (DPR). The DPR is derived by dividing the annual purchase APR by 365. For example, a 19% APR results in a daily periodic rate of approximately 0.052% (19% divided by 365). Interest accrues daily on the outstanding balance, with these daily charges compounding.

If a balance is carried over, interest accumulates daily. The total interest charged for a billing cycle is the sum of these daily accruals, appearing as a finance charge on the monthly statement. Paying only the minimum amount due will not prevent interest from accruing on the remaining balance.

Factors Influencing Your Purchase Rate

The specific purchase rate a cardholder receives is influenced by several factors, beginning with their creditworthiness. Individuals with higher credit scores and a positive credit history generally qualify for lower APRs, reflecting a lower perceived risk to the lender. Conversely, those with lower credit scores may be offered higher interest rates. The type of credit card also plays a role; for instance, rewards credit cards offering benefits like cashback or travel points may have higher purchase APRs compared to cards specifically designed for low interest.

General market interest rates also affect credit card purchase APRs, particularly for variable rate cards. Most credit cards feature a variable APR that fluctuates based on a benchmark, such as the Prime Rate. The Prime Rate itself is influenced by the federal funds rate set by the Federal Reserve, with changes in this rate often leading to corresponding adjustments in credit card APRs. Card issuers typically add a margin to the Prime Rate to determine the cardholder’s specific variable interest rate.

While most credit cards have variable rates, some may offer fixed purchase rates. A fixed rate typically remains consistent, but it can still change under certain conditions, such as if the cardholder habitually misses payments or if their credit score significantly declines. Understanding whether a card has a fixed or variable rate is important, as variable rates can lead to unpredictable changes in interest charges as market conditions shift.