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.
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.
Here are the most common types of credit card interest rates you’ll find on credit cards:
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.
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.
As an example, if you have a 19.99% APR and an outstanding balance of $300 on your card:
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.
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.
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.
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.
If your card’s interest rate isn’t fixed, there are four reasons it could increase:
If for some reason your APR increases, here’s what you should do:
As well as interest rates, make sure you consider the following when you’re looking for a new credit card:
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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