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How credit card interest rates work

Your credit card costs are determined by different types of interest rates, your card's grace period and your repayment schedule.

When you use a credit card, you’re essentially borrowing money from the account’s credit limit. Just like any other loan, interest will be charged on the balance. How and when this interest is charged can have a huge impact on what you’ll pay to borrow money using your credit card.

In this guide, you’ll find answers to the most common questions about credit card interest, including the different rates that may apply and how to take advantage of interest-free days so you can avoid interest charges altogether.

What are credit card interest rates?

An interest rates is a type of fee that’s charged when you borrow money. With credit cards, interest rates are calculated as a percentage of your balance and shown as an annual percentage rate (APR).

For example, a card could have a purchase interest rate of 8.99% APR, while a different card could have a purchase interest rate of 19.99% APR.

Types of credit card interest rates

Here are the most common types of credit card interest rates you’ll find on credit cards:ccf interest woman

  • Purchase interest rate. This is the interest you are charged when you use your credit card for making payments in retail outlets or online. You only incur this interest rate if you don’t pay off your full balance by the due date.
  • Cash advance interest rate. This is the interest rate you are charged when you use your credit card for withdrawing cash from ATMs or cash equivalent transactions, like buying gift cards or gambling.
  • Balance transfer interest rate. This is the interest rate you’re charged when transferring an existing credit card debt to a new card.
  • Promotional interest rate. Many credit card providers offer new customers promotional interest rates for purchases and/or balance transfers. This promotional interest rate is only available for a limited time, with the standard interest rate applying after the specified time period. For example, a card may offer you 0% interest on balance transfers for the first 6 months. If you didn’t pay off the balance transfer during the first 6 months, the standard rate for balance transfers would apply to the debt.

Even the smallest difference in credit card interest rates can have a huge impact on costs. When you’re looking for a new card, make sure you compare both the standard and promotional interest rates to help you find one that suits your needs.

How does credit card interest work and how is credit card interest calculated?

The interest rate on credit cards is normally shown as an annual figure, but most credit card companies calculate interest on a daily basis and then add the charges to your account at the end of each statement period.

To determine your credit card interest amount, your daily outstanding balance is multiplied by the daily interest rate on your credit card. These daily calculations are then added together at the end of the statement period to get the total interest due.

  • The daily interest rate is calculated by dividing the APR by 365 days.
  • The monthly interest rate is calculated by dividing the APR by 12 months.

As an example, if you have a 19.99% APR and an outstanding balance of $300 on your card:

  • Your daily interest rate will be 0.054%, which has you paying $0.16 in interest a day.
  • Your monthly interest rate will be 1.665%, which has you paying $4.99 in interest per month.

The true cost of compound interest

The way credit card interest is charged is known as “compound interest” because it is calculated daily. This means that you could end up paying interest on your interest charges. The good news is that you can cut down on interest costs any time you make a repayment, because that will also affect the daily interest calculation.

Compare credit card interest rates

Say you owe $1,000 on a credit card with a 20.99% APR. If you make $50 payments every month, it would take about 2 years to pay off your balance and would cost about $212 in interest. If the interest rate was only 15.99%, it would still take 2 years to pay off the balance, but you’d only pay about $153 in interest — $53 less than you’d pay with the higher-interest credit card.

The table below shows interest rates, fees and more for some of the most popular cards on the market today. Compare your options to find a card with the features you need at a cost you can afford.

Name Product Welcome Offer Rewards Purchase Interest Rate Annual Fee Min. Credit Score Description
3,500 points
1.5 points per $1 spent
Min. recommended credit score: 660
Get 3,500 Avion points when you get approved for the card.
Neo Credit Mastercard
Get $25.00 + up to 15% cash back
Average 5% cash back
19.99% - 29.99%
Min. recommended credit score: 600
Get $25 when you sign up for the Neo Financial Mastercard. Plus, earn bonuses like 15% cashback on your first purchase at most partners, and earn an average of 5% cashback at thousands of partners and at least 0.5% cashback guaranteed.
Tangerine World Mastercard
10% cash back
Up to 2% cash back
Min. recommended credit score: 600
Earn 10% cash back (up to $100) when you spend $1,000 in the first 2 months. Valid until April 30, 2024. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
American Express Cobalt Card
15,000 points
Up to 5x points per $1 spent
Min. recommended credit score: 700
Earn up to 15,000 Membership Rewards points in your first year. Earn 1,250 Membership Rewards points for each monthly billing period in which you spend $750 in purchases. That’s up to $150 towards a weekend getaway or concert tickets.
BMO CashBack Mastercard
5% cash back
Up to 3% cash back
Min. recommended credit score: 660
Get 5% cash back on all eligible purchases in the first three months of card membership (up to max. spend of $2,500). Plus, get a rate of 0.99% on balance transfers for 9 months. A 2% fee applies to transferred balances.
Tangerine Money-Back Credit Card
10% cash back
Up to 2% cash back
Min. recommended credit score: 600
Earn 10% cash back (up to $100) when you spend $1,000 in the first 2 months. Valid until April 30, 2024. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
RBC Cash Back Mastercard
Up to 2% cash back
Min. recommended credit score: 650
7,000 points
3 points per $1 spent
Min. recommended credit score: 660
Get up to 7,000 welcome points. Get 3,500 points on approval and earn 3,500 bonus points when you spend $500 in your first 3 months.
BMO Preferred Rate Mastercard
0.99% rate on balance transfers for 9 months
$0 annual fee for the first year ($29 thereafter)
Min. recommended credit score: 660
Get a rate of 0.99% on balance transfers for 9 months with a 2% transfer fee. Plus, get the $29 annual fee waived in the first year.
BMO eclipse rise Visa Card
Up to 5 points per $2 spent
Min. recommended credit score: 660
Earn up to 25,000 bonus points.

What is a credit card grace period?

Not exactly. Many people think you have to start paying off your balance immediately after you charge a purchase to your card. In fact, credit card companies offer a grace period during which you can pay off your balance without interest.

Every Canadian credit card provider must provide a grace period of at least 21 days from the end of your billing period. You can find the exact length of your grace period in your card’s terms and conditions. Terms often look something like this:

Your due date will be a minimum of 21 days after the close of each billing cycle. We will not charge you interest on purchases if you pay your entire balance by the due date each month.

What if I only repay part of my balance?

One major credit card myth is that, if you pay off a portion of your balance during the grace period, you’re only charged interest on the outstanding amount. But grace periods are an “all or nothing” deal — if you don’t pay off your entire purchase during the grace period, you’ll be charged interest on the entire amount (even the portion you repaid) all the way back to the original purchase date.

Unfortunately, you agree to this arrangement when you agree to your credit card’s terms and conditions. This is why carrying a balance can be so dangerous. After charging a purchase to your card, plan to pay it off fully before the grace period ends to avoid racking up interest fees.

Why might your credit card’s APR increase?

If your card’s interest rate isn’t fixed, there are four reasons it could increase:

  1. Late payments.
    If you have multiple missed payments, most credit card providers will impose a penalty APR, usually up to 30%. Some card providers will reverse it once you keep your payments on time for at least 6 months, but most of them will keep this APR indefinitely. You can always try calling your credit card company once you’ve made a series of on-time payments to see if they’ll reconsider and lower your rate.
  2. Intro APR period ends.
    Credit cards that come with a 0% intro APR period on purchases, balance transfers or both, will get an APR increase once the intro period ends. In most cases, you will lose your 0% APR if you miss even one payment, regardless of whether or not the intro APR period has expired yet.
  3. Change in the prime rate.
    The Bank of Canada (BoC) occasionally makes changes to the prime rate. A change in the BoC rate will only directly affect your credit card’s APR if you have a variable rate credit card, which is uncommon in Canada as most credit cards have fixed rates. But even with a variable rate card, not every rate change will increase your APR. When the BoC makes a rate cut, your credit card APR should decrease, as well.
  4. Your credit score has dropped.
    If your credit score sees a substantial drop in a short period of time, credit card providers may increase your APR to minimize the risk. While this is less common, your credit card agreement may give your card issuer the right to change your APR at their discretion. Read through your agreement carefully to see if your card company has that leeway.

What should I do if my APR increases

If for some reason your APR increases, here’s what you should do:

  • Pay your balance on time. This is the obvious one. If you pay your balance in full before it’s due, you won’t accrue any interest on your purchases. The longer history you have of on-time payments, the more likely your insurer will lower your APR.
  • Build your credit. This one applies if your card issuer increased your APR because of a drop on your credit score. Typically, once you improve your credit score, your card provider should lower your APR.
  • Get a lower APR credit card. If you have outstanding debt and you can’t pay it off with a higher APR, consider applying for a balance transfer credit card. This can help you consolidate your debt and pay it off without paying interest.
  • Negotiate. Call your card provider and ask them to lower your APR. Note, this could work only if you have a good or excellent credit score and if you’ve demonstrated good financial habits.

What else do I need to know?

As well as interest rates, make sure you consider the following when you’re looking for a new credit card:

  • Interest-free days. Many credit cards offer up to a certain number of interest-free days on purchases when you pay your account balance in full by the due date on your statement. You should be offered a minimum of 21 interest-free days up to a maximum of 55 days. This gives you a way to avoid paying interest charges for spending on your credit card.
  • 0% interest rate offers. If you get a credit card with a promotional 0% interest rate, it may only apply for certain types of transactions. For example, you could get 0% interest on balance transfers for 6 months but still have to pay the standard variable interest rate for any new purchases made during that time.
  • Annual fee. Many credit cards charge an annual fee, which could also add to your account balance. Remember to factor this cost in when comparing credit cards and when budgeting for interest costs and repayments.
  • Other features. Many credit cards offer complimentary extras such as insurance or rewards, which could help offset the cost of the annual fee and interest charges. Weigh the value of the benefits against potential costs so you can decide if a card is worth it based on your spending habits and goals.

Bottom line

When applying for a credit card, it’s important that you read the fine print to understand all of the terms and conditions of your agreement. Understand how much you will be charged for each type of transaction you make in order to plan your repayments and responsibly use your credit card.

While interest rates are important to consider, you should consider other costs like annual fees and foreign currency fees, as well as any benefits you can reap from the card. Check out our guide on low interest rate credit cards Canada to learn more.

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