DEFINITION of ‘Purchase Rate’
The interest rate applied to purchases made with a credit card. The purchase rate only applies to balances that are not paid in full by the end of the billing cycle, with the rate offered typically being a variable interest rate. The rate can be set to zero percent if it is an introductory rate.
BREAKING DOWN ‘Purchase Rate’
Banks and financial institutions charge interest on credit card transactions. The money spent by the cardholder is borrowed from the bank – hence the “credit” in credit card – and the bank charges interest for the privilege of being able to borrow. The rate that is charged depends on the type of transaction, with balance transfer, cash advance, and purchases carrying different rates.
The purchase rate is the interest rate that is most commonly associated with credit cards, and which is most understood by cardholders. This is because cardholders typically use their credit cards to make purchases rather than balance transfers and cash advances.
Individuals and businesses looking to obtain a credit card often look for a low purchase rate, as this is the rate that will apply to the majority of transactions that the credit card is used for. The purchase rate that is quoted in a credit card application may be the rate that is typically applied on the card, but may also be an introductory rate. Introductory rates are often lower than standard purchase rates, and may expire after a period of time. After the introductory period is over, the higher purchase rate will apply.
Credit card companies offering low purchase rates may charge other fees to make up for the shortfall in revenue. For example, a credit card company may offer a low purchase rate but may charge an annual membership fee. Card companies that offer low purchase rates may also offer fewer rewards, such as frequent flyer miles or cash back on purchases.