What is purchase rate on a credit card?

Let’s be honest: credit cards can be confusing. They have dozens of terms that sound alike and even act alike, yet turn out to be different. One of these terms — but certainly not the only one — is purchase rate.

The purchase rate on your credit card is the interest rate applied to the purchases you make using the card. Every time you swipe your card to buy groceries, pay for dinner, or book a trip, this is the interest rate that will be charged on those amounts if you carry a balance past your statement’s due date. Knowing this rate helps you manage your debt effectively and avoid unnecessary interest charges.

How the purchase rate differs from other interest rates

Credit cards come with various interest rates, and knowing the differences can save you from unexpected costs and debt. As we mentioned earlier, the purchase rate applies to the regular transactions you make with your credit card, such as buying groceries, dining out, or shopping online.

On the other hand, the annual percentage rate (APR) includes the purchase rate and other fees and costs associated with the card, spread out over a year. This could include annual fees, balance transfer fees, and more. Your APR will be higher than the purchase rate, as it gives you a clearer picture of the true cost of borrowing.

Then, there are additional interest rates, like a balance transfer rate, which is the rate applied when you move existing debt from one credit card to another and can be as low as 0%. Most cards also have a cash advance rate, which applies when you withdraw cash using a credit card. It’s usually the highest of all credit card interest rates.

How does purchase rate work?

When you use your credit card to make purchases and don't pay off your balance in full by the due date, the purchase rate comes into play. This is the annual interest rate charged on what you owe.

So, if your purchase rate is 20% annually and you carry a balance month to month, the purchase rate determines the extra amount you'll pay. The interest is usually calculated daily based on your outstanding balance and then added up at the end of your billing cycle. Let’s make things clearer with an example:

Imagine you’ve bought a new laptop for £1,000, and you plan to pay it off over a few months. With a 20% annual purchase rate, the daily rate would be about 0.055% (that's 20% divided by 365 days). If your balance stays at £1,000 for the entire month, each day, you accumulate about £0.55 in interest, which would add up to roughly £16.50 for a month.

What factors influence your purchase rate?

When you're shopping around for a credit card, you might notice that the purchase rate can vary quite a bit from one card to another. Let’s explore the various factors that influence this rate:

Your credit score

Credit card issuers use your credit score to assess how risky it is to lend to you. A higher credit score suggests you're a low-risk borrower, which can lead to lower interest rates. Here are a few specific credit factors that matter:

• Payment history: Late payments can negatively impact your score and lead to higher rates.
• Credit history length: A longer credit history provides more data and can contribute to a better rate because it shows a longer track record of managing credit responsibly.

Credit card providers

Different credit card providers have their own methods for setting purchase rates. They often start with a base rate, influenced by broader economic factors like the Bank of England Base Rate, and then adjust from there based on your individual creditworthiness and their own business strategies. This is why you can see varying purchase rates for cards that otherwise offer similar features.

Promotional rates and their lifecycle

Many credit cards offer promotional rates to attract new customers. These rates are often dramatically lower than the standard purchase rates and can even start at 0%. However, it's crucial to understand that these promotions are temporary. Once the promotional period ends, the rate will revert to a higher, standard rate.

What’s more, credit card companies offer 0% balance transfer cards because they assume the average consumer won’t pay their balance off during the introductory period. So, if you choose to use a balance transfer credit card, make sure you have a solid plan in place for paying off your balance.

How to manage your purchase rate

Here’s how you can keep your purchase rate as low as possible:

Build your credit score

Keeping a low purchase rate starts with maintaining a good credit score. Make your payments on time, every time, to keep your credit history solid and position yourself favourably during any interest rate reviews by your card issuer. You should also keep your credit utilisation low—using no more than 25% of your credit limit at a time.

Remember, if you need to use more than 25% of your credit limit, you can make multiple payments throughout the month to avoid having the limit exceed that amount at once.

Use introductory offers wisely

Many balance transfer credit cards offer low or 0% introductory rates for a set period. This can be a great opportunity to pay off any balance, but it takes planning and dedication. Failing to reduce your balance before the introductory period ends could leave you with rapidly-growing debt.

Minimise interest costs

To minimise any interest on your card, pay off your balance in full each month. If that's not possible, pay more than the minimum payment to reduce the principal balance more quickly, which reduces the interest accrued.

However, while paying the minimum isn’t ideal, it’s much better to pay the minimum than miss a payment, which can leave a mark on your credit report for as long as six years.

How to compare purchase rates and choose the right credit card

Comparing purchase rates across different credit cards is crucial because even a small difference in rates can significantly affect how much you pay in interest if you carry a balance. A common mistake many people make when comparing rates is focusing solely on the introductory rate without considering the standard rate that kicks in later.

Don’t forget to consider the other aspects of a credit card. Be sure to consider annual fees, late payment fees, and the grace period. Plus, the credit card company’s customer service and user app can also influence your experience, so you’ll want to make sure your card meets your needs.

The bottom line on purchase rates on credit cards

Understanding and managing your purchase rate on credit cards is crucial for maintaining financial health. Your purchase rate directly influences the cost of the balances you carry, so getting familiar with it can lead to significant savings.

If you want to take your credit score to the next level, qualify for a more favourable purchase rate, or open a new credit card, building your credit score can help you reach your goals. Building your credit score used to be hard and confusing — but not with Pave.

Pave helps you build your credit by reporting your timely payments to all three of the UK’s credit reference agencies, helping improve your payment history — a major factor in your credit score. Plus, we help you protect your credit score by monitoring your bank accounts so you don’t miss upcoming payments. Finally, we’ll help you track your progress. Pave is the only app that allows you to see your credit scores from TransUnion and Equifax in the same place.

If you’re ready to do more with your credit score, join the hundreds of thousands of people who have already started building their credit with Pave.

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Pave cannot guarantee an increase in your credit score. Some features subject to eligibility.