What is the purchase rate on a credit card?

Credit card interest rates are typically presented as an annual percentage. However, most credit providers actually calculate interest charges daily. The accrued interest is subsequently tallied throughout the statement period, usually a month, and added to your account balance. This is known as compounding interest.

What does this mean? As interest accumulates, it's calculated based on the new total owed, which includes both the principal and the previous interest charges. This can lead to debts growing more quickly if not managed properly.

When you use a credit card to buy goods and services, you’re borrowing money from a lender. While most credit cards have monthly interest-free periods (typically 45 or 55 days from the beginning of each month’s billing cycle) in which to repay these debts without accruing extra costs, once these periods expire, you’ll start being charged interest on what you owe at the purchase rate.

It’s important to remember that the purchase rate won’t necessarily apply to all interest charges on your credit card.

Low rate credit cards

Some credit card providers offer low purchase rates as introductory offers when you sign up for one of their cards. These rates can be as low as 0%, allowing you to use the card to make interest-free purchases during the course of the introductory period. But once this introductory period expires, the interest rate will revert to the standard purchase rate, and you’ll start being charged interest on any outstanding balances.

Balance transfer credit cards

If you’re considering switching from one credit card to another, you may want to consider the balance transfer rate. Several credit cards charge no interest on any balance you transfer from your old card to the new one, for a limited period of time. This may help you to repay what you owe without accruing additional interest charges. However, once the introductory period expires, you’ll be charged interest on your remaining transferred balance at the card’s balance transfer rate, which is often higher than the purchase rate.

Cash advances

If you use your credit card to make a cash advance (i.e. getting money out from an ATM using your credit card), you’ll likely be charged interest on this debt at a separate cash advance interest rate, which is often higher than the everyday purchase rate, as many lenders consider cash advances to be relatively risky. It’s also likely you’ll be charged interest on cash advances immediately, without the benefit of the interest-free days that may apply to your credit card purchases.

Typically, a card's purchase rate can be located on the card issuer's official website. It's essential to be aware of this rate prior to applying for a credit card, regardless of your intention to clear the balance each month.

You can also use RateCity’s comparison tables to examine a range of credit cards and their interest rates.

For those who already possess a credit card, the purchase rate can usually be found on your monthly statement, within an associated mobile app, or by contacting a customer service representative via the phone number on the back of the card. Additionally, the most recent edition of the card's terms and conditions will detail interest charges.

Credit card debt can quickly spiral out of control if you’re not careful. If you can’t clear your balance on time, interest charges will increase how much you’ll need to pay. As time passes, interest may start being charged on your interest charges, and before long you could find yourself unable to pay enough off your debt to keep it from growing further.

You can read our helpful guide, outlining several potential strategies for paying off a credit card, or multiple credit cards, so you can quit paying interest charges and unburden yourself from debt. These approaches include:

• Making your credit card payments on time
• Understanding how to read your credit card statement
• Paying more than the minimum interest charges
• Calculating how much you can save by making a balance transfer

The best strategy to pay off your credit card debt will depend on your financial situation. It may be worth speaking to a financial advisor about one or all of these strategies to determine which to pursue for your budget and needs.