Understanding Credit Card Interest Rates in Canada

Credit card interest can be confusing when you’re new to personal finance. Put simply, credit card interest is what you pay for borrowing money through your card. This guide will explain how credit card interest works in Canada, including how it’s calculated, when it applies, and ways to avoid or reduce it (all in a beginner-friendly way).

What Is Credit Card Interest?

When you use a credit card, you’re essentially taking a short-term loan from the card issuer for each purchase or cash withdrawal. Credit card interest is the price you pay for using borrowed money. It’s typically shown as an annual percentage rate (APR), like 19.99% per year, but interest actually builds up daily. If you don’t pay off your entire credit card balance by the due date, the card issuer will start charging interest on the remaining unpaid amount. This interest keeps building daily until the balance is fully paid. The typical credit card APR in Canada is around 19%–20% for purchases.

Types of Credit Card Interest Rates

• Purchase Interest Rate: Usually around 19.99% APR on purchases. You won’t pay interest if you pay your full balance by the due date, usually within a 21-day grace period after the billing cycle ends. But if you don’t, interest starts adding up on the unpaid amount and new purchases.
• Cash Advance Interest Rate: Typically higher (around 22% APR) and no grace period – interest starts accruing immediately. Also, each cash advance comes with its own fee, making them a very costly way to borrow.
• Balance Transfer Interest Rate: Often a special low rate (sometimes 0% for a limited time) for debt moved from another card, usually with a transfer fee (~3%). After any promo period, the balance transfer APR (usually similar to the cash advance rate) applies from the date of transfer.

How Interest Is Calculated and Compounded

Credit card interest is calculated on a daily basis rather than charged once a year. In simple terms, your APR is divided by 365 to get a daily interest rater. (This means interest can compound – if you don’t pay it off, interest gets added to your balance and begins accruing interest itself, which can make debt grow faster.)

How to Avoid or Reduce Interest Charges

Paying less interest (or none at all) on your credit card can save you a lot of money. Here are some key tips:

• Pay Your Balance in Full: The key rule is to clear your full statement balance by the due date — no carried balance means no interest charges. During the grace period, you’re using the card issuer’s money without paying interest, as long as you pay your full balance on time.
• Pay More and Pay Early: If you can’t pay the full balance, try to pay a larger amount as early as possible to reduce interest. Even a small extra amount above the minimum will reduce the principal and cut down future interest charges. Also, try to make payments earlier (for example, throughout the month instead of waiting until the due date) to reduce the days your balance is accruing interest.
• Avoid Cash Advances: Steer clear of using your credit card for cash withdrawals or cash-like purchases unless absolutely necessary. As noted above, they start accruing interest immediately and usually at a higher rate, plus there’s often a fee each time. Cash advances are one of the costliest ways to borrow with your card, so it’s best to avoid them when you can.

Interest Rates, Credit Scores, and Choosing a Card

In general, a better credit score can make it easier to get credit cards with lower interest rates. If you always pay your balance in full, the APR isn’t very important (since you won’t pay interest at all).But if you usually carry a balance, choosing a card can help you spend less on interest and save money over time. Note that carrying a large balance relative to your limit (high utilization) or missing payments can hurt your credit score, so keeping balances low and paying on time will minimize interest (and keep your credit healthy).

Summary

Understanding how credit card interest works is key to using your card wisely. Since interest rates are usually high, the best way to avoid paying extra is to pay off your full balance each month. Always take advantage of the grace period, and if you must carry a balance, try to pay it off as soon as possible to minimize the cost. Be mindful of interest rate differences and avoid costly transactions like cash advances whenever you can. By using your card responsibly – paying on time, staying within budget, and knowing the terms – you can enjoy the benefits of credit cards without falling into the interest trap.

New to credit in Canada? Start with our complete beginner’s guide to how credit cards work in Canada for everything you need to know.