What is the buy rate?

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




What is the purchase rate on a credit card?




The term “purchase rate” refers to the interest rate applied to regular purchases you make with your credit card. It will usually be advertised as one of the main features of a credit card, and some cards may even come with a special low purchase rate.




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




Although the purchase rate is specific to the purchases you make, there are other types 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 buy rate work?




At the end of each credit card billing cycle (usually between 28 and 31 days), your supplier will charge interest on any outstanding balance for your purchases. You will then be responsible for repaying any remaining balance on the card, together with any interest that has been applied. You must pay this amount (or failing that, the minimum payment required) on the next due date of your billing cycle.




If you have paid off your card balance in full by the due date of your billing cycle, you will not have to pay interest, so the purchase rate will have no effect on you. This means that if you’re able to keep track of your credit card repayments every billing cycle, you can avoid paying interest entirely.




It should be borne in mind, however, that if you choose to pay only the minimum amount required 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 increase your credit card balance over time. It can also impact your credit rating if you don’t pay off your credit card on time.




How is credit card interest calculated?




There are three main things to understand when it comes to calculating credit card interest:




  1. Annual Percentage Rate (APR): This is the interest rate quoted for your credit card.
  2. The daily rate: This is the APR divided by 365.
  3. Average daily balance: This is your credit card balance 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 on your credit card statement, and multiply it 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 refund.




The daily rate for your card is approximately 0.000554%, which is the purchase rate of 20.24% (0.2024) divided by the 365 days of 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 if you hadn’t paid the $1,500 owed on your card, your interest for the month would be around $24.95.




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




Some credit card providers specifically offer low rate credit cards. You can compare low rate credit cards with Canstar to find the right one for your particular needs and situation, including how much you think you’re likely to spend on your credit card each month. As of this writing, there are unsecured credit cards in Canstar’s database with a purchase rate as low as 7.49% per annum, as long as you meet the provider’s eligibility criteria . The average purchase rate for personal credit cards on the Canstar database is 13.82% at the time of writing. There are also 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-it-now, pay-later (BNPL) programs.








What are the different types of credit card interest?








Cash advance rate




This is the interest rate applied to cash advance transactions; for example, when you use your credit card to withdraw money from 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 interest rate charged when you transfer your credit card balance to a new one. Some providers offer time-limited 0% balance transfer offers, otherwise the interest rate may be equivalent to the purchase rate or cash advance rate.




Introductory prices




Some credit card providers offer a special rate to entice customers to sign up. These low introductory rates can apply to purchases, balance transfers, or both, and can last for a period of time, up to 20 months in some cases, before returning to the standard rate.




Cover image source: Zivica Kerkez/Shutterstock.com





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