What is the purchase rate?

If you have a credit card or are thinking about getting one, you may have heard of the purchase rate, but what exactly is it, how does it work and how does it affect the amount of interest you pay?

What is the purchase rate on a credit card?

The term ‘purchase rate’ refers to the interest rate that is applied to regular purchases that you make with your credit card. It will generally be advertised as one of the key features of a credit card, and some cards can even come with a special low purchase rate.

When you spend money on a credit card, you are borrowing money from a lender, and this money must be repaid. If there is any outstanding balance on your card at the end of a statement period, when your monthly repayment is due, then an interest charge will be added. This interest charge is calculated at the purchase rate.

While the purchase rate is specific to purchases you make, there are other kinds of interest rates that apply to credit cards, including balance transfer and cash advance rates, which are explained in more detail below.

How does the purchase rate work?

At the end of each credit card billing cycle (typically around 28 to 31 days), your provider will apply interest to any balance that you have outstanding for purchases. You will then be responsible for paying off any balance that is still on the card, as well as the interest that has been applied. You will need to pay this amount (or failing that, the minimum required payment) by the next due date of your billing cycle.

If you have paid off the balance of your card in full by the due date of your billing cycle, then you will not need to pay any interest, so the purchase rate will not have an effect on you. This means that if you are able to keep up to date with your credit card repayments each billing cycle, you can avoid paying interest entirely.

It is worth keeping in mind, though, that if you choose to only pay off the minimum required amount on your credit card, and not the full balance, then any interest that has been added will remain on your statement for the following month, which can drive your credit card balance up over time. It can also impact your credit rating if you miss making credit card repayments on time.

How is credit card interest calculated?

There are three main components to understand when it comes to how credit card interest is calculated:

1. The annual percentage rate (APR): This is the stated interest rate for your credit card.
2. The daily rate: This is the APR divided by 365.
3. The average daily balance: This is the balance of your credit card, multiplied by the number of days in the month.

In order to calculate interest, banks and lenders will take the daily rate, multiply it by the average daily balance of your credit card statement, and multiply that by the number of days in the month.

Consider this hypothetical example: You have a credit card with a purchase rate of 20.24%. In the month of April, which has 30 days, you spend $1,500 on this card, without making a repayment.

The daily rate of your card is approximately 0.000554%, which is the purchase rate of 20.24% (0.2024) divided by the 365 days in a year.

Your monthly interest is the daily rate (0.000554%) multiplied by the amount owing on the credit card ($1,500), multiplied by the 30 days of April.

This means that, had you paid off none of the $1,500 owing on your card, your interest for the month would be approximately $24.95.

Can you get a credit card with a low purchase rate?

Some credit card providers specifically offer credit cards with low rates. You can compare low rate credit cards with Canstar to find one that may be suitable for your particular needs and situation, including how much you believe you are likely to spend on your credit card each month. At the time of writing, there are unsecured credit cards on Canstar’s database with a purchase rate as low as 7.49% pa, as long as you fit the provider’s eligibility requirements. There are also some interest-free credit cards in Australia with a 0% purchase rate, but many cards are only interest-free for a limited time. This type of card also typically charges a flat monthly fee, as an alternative to buy now pay later (BNPL) schemes. Some cards will also offer a low purchase rate as an introductory offer, charging this lower rate for a period of several months before reverting to a higher rate down the line.

→ Find out more: Top rated credit cards

What are the different types of credit card interest?

Along with the purchase rate, credit cards can also have a cash advance rate and a balance transfer rate, and sometimes special introductory rates can apply for new customers.

Cash advance rate

This is the interest rate that is applied to cash advance transactions; for example, when you use your credit card to withdraw cash at an ATM or bank branch. Generally speaking, the cash advance rate on a credit card will be higher than the purchase rate.

Balance transfer rate

This is the rate of interest charged when you transfer the balance of your credit card to a new one. Some providers offer limited-time 0% balance transfer deals, otherwise the interest rate can be equivalent to the purchase rate or cash advance rate.

Introductory rates

Some credit card providers offer a special low rate as an incentive for customers to sign up. These low introductory rates can apply to purchase, balance transfers or both, and can last for a while, such as up to 20 months in some cases, before reverting to the standard rate.

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