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What is a credit card purchase rate, and how does it work?

By Royal Bank of Canada

Published May 1, 2024 • 6 Min Read

What is a credit card purchase rate, and how does it work?

To understand the ins and outs of a credit card’s purchase rate, it’s important to first know a few basics about interest. Interest, in short, is the fee you’re charged for borrowing money. When you use a credit card, that’s essentially what you’re doing.

Following a purchase on your credit card, you are entitled to an interest-free grace period. This is the number of days between the date your monthly statement is issued and the date your payment is due. With an RBC credit card, you have a minimum 21-day interest-free grace period for new purchases. You can avoid interest on those new purchases by paying your balance – i.e., the amount you “borrowed” – in full on or before the payment due date, which you can find on your credit card statement, in Online Banking or the “Details” tab within the RBC Mobile app.

What is a purchase rate?

The purchase rate is the rate of interest charged on purchases you make with your card if you don’t pay off the full amount of those purchases by the due date. 

For example, let’s say you spend $2,000 on groceries, gas, clothing, and food delivery in a given month. If you only make a payment of $200 by your payment date, you will have an outstanding balance of $1,800. You will be charged interest on this $1,800 until you pay it off in full.

How monthly interest is calculated based on your purchase rate

While purchase rates will vary depending on the credit card you hold, a standard purchase rate is anywhere from 19.99% – 21.99%– for the sake of simplicity, a rate of 20.99% will be used below in the example.

Interest is calculated daily; however, it is only added to your account on a monthly basis when your statement is generated.

Here’s how to get an estimate of your monthly interest charges. Please note that this is a guide only and real examples may vary based on the dates of your purchases: 

  • Because interest is calculated daily, the first step is to find the daily interest rate. This is calculated by taking the 20.99% purchase rate and dividing it by the number of days in the year. 

    • Example: Divide your 20.99% purchase rate by 365 for an average daily interest rate of 0.057%.     

  • Then, the daily interest charge is calculated. This is done by multiplying your average daily balance ($1,800) by the daily interest rate. 

    • Your daily interest charge is $1,800 x 0.055% = $1.04    

  • The average daily interest is multiplied by the number of days in the statement period to determine the monthly interest. 

    • Example: Your daily interest of $1.04 is multiplied by 30 days for a total monthly interest charge of $31.20.

Where is the purchase rate on the credit card statement?

Your purchase rate is easy to find. Most credit card statements have a Payments & Interest Rates section along the top or side of the statement. There, you’ll see details such as your minimum payment, payment due date, credit limit, and available credit, along with your annual interest rates. Your purchase rate, cash advance rate, and any other special or introductory rates on your account will be listed there.

What’s a minimum payment?

The minimum payment is the minimum amount you must pay each month on your credit card balance. Your minimum payment will be either a flat dollar amount, usually $10, plus any interest and fees, or the higher of this dollar amount or a percentage of your outstanding balance. Your credit card agreement will tell you which method your credit card issuer uses to calculate your minimum payment.  

It is important to make at least your minimum payment every month to avoid paying extra fees, negatively affecting your credit score and/or losing any promotional interest rates you may have received.

Special circumstances, exceptions and other points to consider

Your credit card’s purchase rate is fairly straightforward, but there are a few extra things worth understanding: 

  • Grace period: Your purchase rate doesn’t kick in the moment you make a purchase. Most credit cards must offer an interest-free grace period of at least 21 days. This is the window of time during which you won’t be charged interest on your credit card balance. This can be extended to 25 days following a missed payment.

  • Trailing interest (Final interest). If you carry a credit card balance from one month to the next, that interest will also carry across billing cycles. If you pay your balance off in full after carrying a balance, be sure to check your next statement, as you may have a trailing interest charge to cover for the period where a portion of your balance from last month remained unpaid.

  • Balance transfers: A balance transfer moves a balance from one credit card to another, typically with a lower promotional rate. These promotional rates last for a set period of time (often 6 – 18 months), after which a regular purchase rate takes effect.

  • Quebec: The province of Quebec has recently introduced new minimum payment rules to help consumers pay down their credit cards faster. Since August 1, 2023, the minimum credit card payment for Quebec residents is 4%. The rate will increase by 0.5% until it reaches 5% in 2025.

  • Business credit cards: If you own a business and are considering a business credit card, keep in mind that the purchase rate may be calculated differently. It’s best to speak with a business banking advisor for advice.

Tips to reduce the amount of interest you pay

The simplest way to avoid paying high interest on your credit card is to pay off the balance in full before the due date each month. But this isn’t always possible. If you can’t pay off your balance in full, these tips can help you reduce the amount of interest you pay: 

  • Make smaller payments as soon as possible rather than waiting until the end of the month. Remember, interest is calculated daily, and a lower daily balance will minimize the amount of interest charged overall.

  • If you have multiple credit cards, pay them off according to their interest rates, starting with the highest-interest-rate card.

  • If you consistently carry a balance, consider applying for a lower-interest-rate card. 

While you don’t need to pull out your calculator every month to determine your credit card’s purchase rate (your credit card issuer will do that for you), it’s worth understanding how it works so you can use your credit card effectively. Knowing the basics can help you reduce the amount of interest you pay and use your card as the convenient and flexible payment tool it’s meant to be.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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