Interest on credit cards is much higher compared to other kinds of debt, such as student loans, car loans, and mortgages. Managing credit cards is critical to one’s financial future.
Credit card interest in Canada is billed every month on the unpaid balances after the payment due date. Unpaid balances are charged interest daily from the date of purchase. Interest can be avoided by paying off the balance every month before the grace period of at least 21 days expires.
To keep things in perspective, let us look at a few examples of how much interest is charged for every balance and how exactly credit card interest works.
How Credit Card Interest is Calculated
Purchase balances that are paid every month are exempt from interest. Interest on credit cards is charged daily on the remaining unpaid balances. Credit card rates are often stated as a yearly rate. A credit card interest of 20% per year is equivalent to around 1.67% interest per month (20%/12) or 0.055% per day (20%/365).
For example, a $5,000 credit card debt at 20% interest will be charged about $2.74 per day.
Calculation: $5,000 x 20% / 365 days = $2.74 per day
Holding this credit card balance for 90 days will result in a credit card interest of $246.58 ($5,000 x 20% / 365 days X 90 days).
Common Credit Card Interest Rates in Canada
- Purchase Interest Rate: 19.99%
- Cash Advance Interest Rate: 22.99%
- Interest on Balance Transfers: 22.99%
A lower interest card may be available if you have a high credit score. However, lower interest credit cards may come with an annual fee. Low interest credit cards in Canada typically range from 8% to 15%, which is still higher compared to most student loan debt and mortgages.
Monthly Credit Card Interest for Every Balance
| Balance | Purchase Interest (19.99%) | Cash advance (22.99%) |
| $100 | $1.64 | $1.89 |
| $500 | $8.22 | $9.45 |
| $1,000 | $16.43 | $18.90 |
| $5,000 | $82.15 | $94.48 |
| $10,000 | $164.30 | $188.96 |
| $20,000 | $328.60 | $377.92 |
Credit card interest on balances below $1,000 may not seem like a lot, but it is always a good habit to pay off balances every month, where possible. A credit card balance of $10,000 will result in an interest rate of $164.30 a month, which can add up and be a burden over time.
Yearly Credit Card Interest for Every Balance
| Balance | Purchase Interest (19.99%) | Cash advance (22.99%) |
| $100 | $19.99 | $22.99 |
| $500 | $99.95 | $114.95 |
| $1,000 | $199.90 | $229.90 |
| $5,000 | $999.95 | $1,149.50 |
| $10,000 | $1,999.00 | $2,299.00 |
| $20,000 | $3,998.00 | $4,598.00 |
Interest on the table is not compounded daily. For example, a balance of $10,000 compounded daily will result in interest of $2,214.14. Credit cards in Canada require the interest to be paid off every month.
Should you only pay the interest (or minimum payments) every month, the total interest on a $10,000 balance in a year will be somewhere in between $1,999 and $2,214.14 (around $2,100 interest).
Should I Pay off my Credit Card Balance and Interest Every Month?
Paying off your credit card balance allows you to avoid paying the 20% interest. A 10% return is often considered a good return on investment. Paying off credit cards that save you 20% is often better than investing to potentially earn just 10%. High debt loads can negatively impact a person’s credit score.
Thus, most advisors recommend paying off credit card balances before investing in anything.
Cash Back Credit Cards in Canada
| Annual Fee | ||
| Tangerine Money-Back Credit Card (Mastercard) (tangerine.ca) | 2% cash back in two categories of your choice, 0.50% cash back on all other purchases | $0 |
| RBC Cash Back Mastercard (rbcroyalbank.com) | 1-2% Cashback on groceries, 0.50-1% cash back on all other purchases | $0 |
| Neo Card (neofinancial.com) | 5% average cashback, 1% guaranteed cash back on all purchases (Neo will top up when cash ack is below 1%) | $0 |
Promotional Interest Rates
Promotional interest rates may be available for new credit cards. These are often low rates of below 5% on purchases, cash advances, or balance transfers which lasts from 3-9 months. Credit card issuers offer these promotional rates to encourage people to open a credit card with them.
When is Credit Card Interest Charged in Canada
- Purchase Interest Rate – Zero interest when paid every month. Interest applies from the date of purchase when unpaid.
- Cash Advance Interest Rate – Interest applies immediately.
- Balance Transfer Interest Rate – Interest applies immediately.
Interests are applied immediately for cash advances (drawing cash from a credit card or transferring cash from a credit card to a chequing or savings account) and balance transfers (transferring credit card balance to another credit card).
Purchase interest can be avoided by paying off the balance within the grace period (usually 21 days) after the monthly statement is issued. Assume a monthly statement for the period between June 15 and July 15. Purchase interest can be avoided (pay zero interest) as long as you pay the balance stated on the monthly statement on or before August 5.
Thus, you will pay zero interest when you fully pay the balance on the monthly statement every month.
Credit card monthly statements contain all of your purchases, the balances you owe, the interest charged for the month, the minimum payment amount, and all activities related to your credit card in the last month.
Should you pay less than the balance on the monthly statement after the grace period expires, interest on purchases will be charged from the date of purchase. From the same example, purchases on June 30 will be charged the interest for the whole month of July in case the monthly statement balance remains unpaid after August 5.
Low Interest Credit Cards in Canada
| Credit Card | Purchase Interest Rate | Cash Advance Interest Rate | Annual Fees |
|---|---|---|---|
| TD Emerald Flex Rate Visa Card (Source) | TD Prime + 4.50% to 12.75% | TD Prime + 4.50% to 12.75% | $25 |
| Scotiabank Value VISA Card (Source) | 12.99% | 12.99% | $29 |
| RBC Visa Classic Low Rate Option (Source) | 12.99% | 12.99% | $20 |
| CIBC Select Visa Card (Source) | 13.99% | 13.99% | $29 |
How can I avoid paying interest on my credit card?
To avoid paying interest on a credit card, make sure to pay off your balances every month. A credit card issues a monthly statement that contains the balance you need to pay. Where possible, avoid taking cash advances since interest is charged immediately on cash advances.
Should I pay off my credit card after every purchase?
There is no need to pay off credit cards after every single purchase. Interest will also be avoided when you pay off the balances every month on the credit card monthly statement.
Tips for Lowering Credit Card Interest Fees
- Take advantage of the promotional interest rate. (Caveat: Low credit scores may not be approved for additional credit cards.)
- Pay off the balance every month (to avoid interest fees.)
- Where possible, pay more than the minimum payment.
- Create a plan on how to pay off debt. (Earn more income or cut expenses.)
- Avoid cash advances where possible.
Cash advances may have higher rates. Additional fees of $5 or 1-3% may be charged on cash advances. At the same time, access to cash advances can be useful in case of an emergency.
Consider taking on a personal loan or a loan with a lower rate than credit cards. However, a lower rate may only be accessible with an average to high credit score and a reliable income.
Minimum Payments on Credit Cards
Everyone should at least pay the minimum payment every month. Failing to pay the minimum payment (multiple times) may result in a higher interest rate and a lower credit score.
The minimum payment on most credit cards in Canada is $10 plus the interest charges for the month. Paying the minimum payment will only reduce your credit card balance by $10 every month.
Thus, a $2,000 credit card balance will take you 200 months, or approximately 16 years and 8 months, by merely paying the minimum payment.
Credit Card Payment Due Date
Credit card payment due date is often 21 days after your credit card monthly statement. Interest on purchases can be avoided when payments are made before the due date. Failure to make the minimum payment on or before the due date may result in a higher interest and lower your credit score.
Can I withdraw cash from my credit card?
Withdrawing cash from a credit card is possible. However, some credit cards may have a limit on the amount of cash you can withdraw from a credit card. Also, interest may be slightly higher on a cash advance compared to purchases. Interest is charged immediately on cash advances.
How Credit Card Payments are Applied between Different Rates (Cash Advance and Purchases)
Credit card payments are applied in proportion to the amount of balances you have. For instance, a person has a balance of $1,500 in balance transfers at 5% interest and a balance of another $500 in purchases for a total at 20%.
Should the person make a $500 payment, 75% or $375 will be applied towards the balance transfer balance and $125 (25%) will be applied towards the purchases balance. The original balance has 75% (1,500/2,000) in balance transfers and 25% (500/2,000). As such, payments are allocated in the same way.
Most credit cards payments in Canada works like this, but some cards may have a different credit card agreement which you will be shown when signing up for a new credit card.