Credit cards provide a convenient way to make purchases. But this convenience can be costly if not managed properly. For example, when you don't pay your balance in full by the due date, the card issuing company charges you a carrying cost on the unpaid amount. This is how the issuers make money.
In Canada, credit card companies calculate credit card interest daily and compound it over time. This means you’re charged on both the original credit card balance and any interest charges that have accumulated. This can quickly add up if you only make minimum payments. So, how does credit card interest work, and how can you ensure it doesn’t jeopardize your finances?
What is a Credit Card Interest Rate?
A credit card interest rate is the money an issuer charges you when you don’t pay off your card balance in full by the due date. This carrying cost is like a fee for borrowing the company’s money, and it gets added to what you owe every day until you pay it all back.
The interest rate is typically expressed as an annual percentage rate (APR). In Canada, this number often ranges from 19% to 29%. The key word here is “annual”, which may give you the impression that issuers calculate the rates on an annual basis.
Credit card companies actually calculate the APR daily. So, if your account has a 19% APR, the daily rate would be about 0.052% (19% divided by 365 days).
Credit card issuers often subject borrowers to fixed interest rates. Fixed rates stay the same unless the issuer notifies you of a change.
What Are the Different Types of Credit Card Interest?
We’ve already seen that credit card interest rates are fixed. However, credit card companies apply different rates to an account, depending on how the borrower utilizes the loan. This also defines the different types of rates, which are as follows:
Purchase rate: This is the standard rate applied to everyday purchases, and it kicks in when you don't settle the balance owed by the due date. This is the rate that most people think of when talking about credit card interest.
Cash advance rate: Sometimes you need physical money to pay for certain services, which leads you to withdraw cash from an ATM using a credit card. When you do this, the credit card issuer will charge a fee for the cash advances. While some utilizations of the credit card can have interest-free grace periods, this one doesn’t, and the charges are often higher.
Balance transfer rate: This applies when you move the remaining credit card debt from one credit card company to another. The regular rate is similar to purchase rates, but some companies offer promotional rates as low as 0% for a limited time.
Promotional interest rate: Also called introductory interest rates, this type is often a limited-time offer from companies that want to attract or reward new customers. These kinds of rates can apply to purchases, balance transfers, or both. But once the promotion period ends, the account reverts to regular rates.
Penalty rate: These interest charges apply to missed payments. Like any other debt product, the charged interest can increase your card’s regular rate by a significant margin, even 10 percentage points.
How Do Credit Card Interest Rates Work in Canada?
We learned earlier that credit card interest is the cost of borrowing money when you don’t settle the credit card balance in the required time. And lenders express this cost as an annual percentage rate. However, the lenders calculate interest daily, and this is done using your periodic daily rate, which is arrived at by dividing your account’s APR by 365 days.
Suppose your card has a 19% APR. The first thing you’ll do is get the daily rate, which, as we already know, is: 0.19 ÷ 365 = 0.00052.
If your account’s average daily balance is $1,200, then you would owe $0.62 (0.00052 x $1,200) per day. But no one pays the fee daily. Most companies have a 30-day billing cycle, so your 30-day interest charges will be $0.62 x 30 = $18.74.
When Do Credit Cards Charge Interest?
Lenders only charge interest when the due date lapses and you haven’t paid the balance in full. Most Canadian credit card companies offer an APR-free grace period between the end of the previous billing cycle and the due date.
However, there are exceptions. Cash advances, for instance, start to accrue interest immediately with no grace period. The same applies to cash-like transactions such as making wire transfers, buying lottery tickets, etc. If you miss the payment due date or only make the minimum payment, interest charges will apply to the entire balance from the original purchase date, not just from the due date.
Real-World Example of How Credit Card Interest Works
Suppose you use a Collabria Cash Back Visa Infinite® Card with a 20.99% APR. And let’s say your card balance is $2,000.
If you only make partial payments, it may take years to clear the loan. Typically, the minimum amount you owe every due date is 2% of the entire statement balance or $40, whichever is higher (or the entire new balance if it is less than $40.00). The table below shows what would happen if you only made minimum payments on your $2,000 balance.
Month | Starting Balance | Minimum Payment (2%) | Portion Going to Interest | Portion Going to Principal | Ending Balance |
1 | $2,000.00 | $40.00 | $35.00 | $25.00 | $1,975.00 |
2 | $1,975.00 | $40.00 | $34.91 | $24.69 | $1,950.31 |
3 | $1,950.31 | $40.00 | $34.82 | $24.38 | $1,925.93 |
As you can see, despite paying $177.76 over three months, only $74.07 goes toward reducing your actual debt. The rest ($103.69) goes to carrying costs.
If you continue making only partial payments, it will take over 11 years to pay off the original $2,000 and you'd pay approximately $2,500 in interest — more than the original amount borrowed! In other words, paying only the minimum can be costly in the long run.
What is a Good Interest Rate for a Credit Card?
“Good” is a subjective term that doesn’t mean the same thing to everyone. This is because it depends heavily on your financial situation and factors like credit history.
Generally speaking, a good interest rate is the lowest you can qualify for. This reduces the cost of borrowing if you ever carry an unpaid balance.
If you always pay the full balance every month, the interest rate matters less than other features like rewards or benefits. Collabria’s Cash Back Visa Infinite® Card, for instance, offers valuable rewards that may outweigh its 20.99% interest rate if you never carry a balance.
However, if you anticipate carrying a balance, even occasionally, a lower interest rate becomes significantly important. In such a case, a good interest rate should be below the average purchase APR.
What Is the Average Credit Card Interest Rate in Canada?
On average, Canadian credit card companies charge between 19.99% and 25.99% APR. This rate is significantly higher than other forms of lending.
Premium rewards cards, like the Visa Infinite® Card with its 20.99% rate, generally have rates at the higher end of this spectrum because they offer enhanced benefits and rewards programs.
Low interest credit cards may offer rates as low as 12.99%, but these usually come with fewer perks and rewards. Retail credit cards often have the highest rates, sometimes reaching 29.99% or more.
Conclusion
Questions such as how much interest you’ll pay when you use a specific credit card are easily answered when you know how credit card interest works. This type of loan introduces plenty of convenience, but it could also lead to mounting debt if not handled carefully.
The compound interest aspect of this debt means that both the accumulated carrying cost and the current balance accrue interest. That’s why it’s always advised to pay the entire credit card balance each month to avoid interest charges completely.
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FAQs
Where can I find my credit card interest rate?
This information can be found on your monthly statement, in your cardholder agreement, through your online credit card portal, or by calling the customer service number on the back of your card. Most institutions, including Innovation, display the rate on their websites under the credit card section.
How do you avoid paying interest on a credit card?
Pay the entire credit card balance by the due date. Even better, you can set up automatic payments to ensure you never miss one. You should also avoid cash advances as they start accruing interest immediately. This also prevents your account from accruing cash advance fees.
Do you get charged interest on your card if you pay the minimum?
Yes. When you only pay the minimum amount due, you'll be charged interest on the remaining balance. The unpaid portion will be charged interest daily, and you'll pay carrying costs on both the principal balance and any accumulated interest charges.