If you've ever carried a balance and wondered why your bill keeps climbing, it helps to know how credit card interest works. Your bank charges a fee whenever you borrow – whether for a purchase, cash advance, or balance transfer – calculated using the amount borrowed, the timing, and your card's Annual Percentage Rate (APR).
Individual credit cards have their own interest rates, and there's a specific category of low-interest credit cards for those who tend to carry credit card balances.
This article discusses the different types of credit card interest, explains how to avoid accruing interest, offers advice on dealing with credit card debt, and much more.
Key Takeaways
- Interest is a fee charged by your credit card issuer whenever you use your card to borrow money.
- Credit card interest applies to purchases, cash advances, and balance transfers.
- How much interest you owe depends on how much money you borrowed, how long ago you borrowed it, and your card’s annual interest rate (APR).
- You can avoid credit card interest by paying your bills in full and on time and repaying cash advances immediately.
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How credit card interest works – what is it?
To understand how credit card interest works, you first need to understand what it is. Each time you use your credit card, you're borrowing money from your credit card issuer. Sometimes, you have to pay more money than you originally borrowed – and that extra charge is known as interest.
How much credit card interest you owe depends on 3 factors:
- How much money you borrowed: The more money you borrow, the more interest you pay.
- When you borrowed the money: The longer you leave your bill unpaid, the more interest accrues.
- Your credit card interest rate, or annual percentage rate (APR): APR represents approximately how much interest you'd owe if you ignored your bills for 1 year. For example, 19.99% APR means you'd owe about $19.99 in interest on a credit card balance of $100. Keep in mind that this doesn't include late fees or penalties.
Different borrowing methods follow different rules – some benefit from interest-free grace periods while others don't. Some use fixed interest rates, while others use variable rates.
Whatever the amount, paying credit card interest is a mandatory part of your credit cardholder agreement. If you ignore it, you run the risk of spiralling into debt, lowering your credit score, and even losing your credit card.
Different types of credit card interest
There are 3 ways to borrow money with a credit card: purchases, balance transfers, and cash advances.
Each one uses either a fixed interest rate or a variable interest rate, which changes based on the prime rate (which moves in line with the Bank of Canada's policy rate). Fixed interest rates are by far the most common. You can find them online or in your card's terms and conditions.
Credit card issuers often attract new customers by offering introductory, promotional interest rates for a limited time. As long as you're a new customer, you'll benefit from lower interest charges (especially on balance transfers) for 6 – 12 months.
That said, your credit card's APR could also change if you miss 2 or more payments. Credit card issuers use penalty interest rates – often around 25% to 28%, and as high as roughly 31% on some cards – to deter customers from ignoring their bills.
We created a cheat sheet to help you understand the general rules, but you should always check your individual cardholder agreement before you borrow:
| Purchases | Balance transfers | Cash advances | |
|---|---|---|---|
| Description | Purchase interest applies to the cost of goods and services bought with a credit card, whether you paid by mail, by phone, in person, or online. | Balance transfer interest applies to balances transferred from one credit card to another. | Cash advance interest applies to money withdrawn from ATMs using a credit card. When you make a cash advance, you're borrowing from your card's credit limit. |
| Interest-free grace period | 21 – 55 days | None | None |
| Extra fee | None | 0% – 3% of balance | Fixed, percentage of amount borrowed, or a combination |
| APR | 0%* – 30% | 0% – 17.99% | Typically 22.99% – 27.99% |
| How to avoid it | Pay off your credit card in full by the due date listed on each credit card statement. | Pay off the transferred balance in full before the promotional, low-interest period expires. | Repay all cash advances and cash-like purchases as soon as possible. |
* Represents introductory, promotional interest rates.
Pro tip: You can pay your bills with a credit card by setting up pre-authorized payments. Your bill payments will then be treated like purchases, not cash advances.
How credit card interest works – how it's calculated
Understanding how it's calculated is essential to understanding how credit card interest works. The most important thing to know is that it's time-sensitive – the longer you ignore it, the worse it gets.
To calculate the purchase interest after one billing cycle, issuers first work out your average daily balance: they add up your credit card's closing balance for each day, not just the day's transactions, then divide by the number of days in your billing cycle. The daily interest rate is then applied to that average.
Most credit card issuers don't just apply daily interest – they also compound it. With compound interest, the Daily Periodic Rate applies to each day's balance, including any interest accrued so far.
In other words, you're paying interest on interest. They add up all the interest and charge it to your next billing statement.
How to calculate interest
The easiest way to calculate interest is to use a credit card interest calculator.
Credit Card Interest Calculator
Enter your current balance and then adjust the slider to match your credit card's interest rate. Try increasing your monthly payments gradually to see how much interest you'll save.
If you're interested in transferring the balance to a new card, use the second slider to set the new card's interest rate. To find out the cost of carrying a balance for 1 month, enter the same number under "Current Balance" and "Monthly Payment."
Remember: The sooner you pay off your credit card, the less interest you pay. The calculator can help you find the sweet spot between affordable monthly payments and interest savings.
How credit card interest works – how to resolve it
The only way to kill credit card debt is to pay it off, which you can do in 3 steps:
- Reduce your spending by making a budget and putting your credit cards out of reach. This might mean switching to paying for things with cash or debit cards so you don't add to your credit card balance.
- Organize your debt by noting your card due dates and interest rates. Decide if you'd like to tackle your smallest debt first or put your payments towards credit cards with the highest interest rate.
- Pay off your credit card by setting up reminders or pre-authorized payments. This might mean making more frequent payments – especially if you've been making a single payment a month.
Part of your debt plan might involve consolidating your debt by using a balance transfer credit card. Just remember, those promotional, introductory interest rates don't last forever.
How credit card interest works – how to avoid it
Now that you understand how credit card interest works, you can avoid it by preventing it from accumulating. Read your cardholder agreement and carefully note any grace periods and deadlines, then compare them to your cash flow.
In the interest of saving our readers even more money, we've identified simple dos and don'ts for avoiding credit card interest:
1. Don't get a cash advance
Like payday loans, withdrawing money from a credit card should be avoided at all costs. Cash advances begin accruing interest immediately and carry the highest interest rates on the market, making them a ticking time bomb of debt.
2. Don't make only the minimum payment
Making the minimum payment keeps your credit card account in good standing and prevents late fees, but it doesn't stop interest from piling up. Not only that, but most of the money from every minimum payment goes toward paying interest, so it could take years to shrink your debt.
3. Do pay in installments
Modern credit cards offer a variety of buy-now, pay-later installment plans, with the idea of reducing interest, not avoiding it.
Let's say you want to buy an ATV with the American Express Cobalt Card for $1,500 and pay for it over the next 3 months. You can make the purchase, log in to your American Express account, and use Plan It to split it into 3 monthly payments for a 0.85% fee, or $12.75 each month.
Ultimately, you'd save about $17 in interest compared to carrying a balance for 3 months at 21.99% APR.
Pro tip: Lines of credit and personal loans typically have lower interest rates than credit cards, often making them better choices for financing a large purchase.
4. Do pay your bills on time
Purchases don't incur any interest at all if you pay your credit card off within the interest-free grace period, which is typically 21 – 55 days.
The end of the grace period is your credit card's payment due date. Check your statement and make a note in your calendar to send a payment at least 3 days in advance, or set up credit card autopay so you're never late.
The best low-interest credit cards
If you often carry a balance and love the convenience of using credit, you may as well embrace it with a low-interest credit card. Our top 3 picks offer purchase interest rates lower than 13%:
| Credit card | Annual fee | Interest rates | Welcome bonus | Learn more |
|---|---|---|---|---|
| MBNA True Line Mastercard | $0 | * Purchase: 12.99% * Cash advance: 24.99% * Balance transfer: 17.99% |  $40 GeniusCash + 0% interest on balance transfers for 12 months (terms) | Learn more |
| CIBC Select Visa Card | $29 | * Purchase: 13.99% * Cash advance: 13.99% * Balance transfer: 13.99% | 0% interest on balance transfers for 10 months (terms) | Learn more |
| Desjardins Flexi Visa | $0 | * Purchase: 10.9% * Cash advance: 12.9% * Balance transfer: 12.9% | Learn more |
FAQ
How does interest work on Canadian credit cards?
When you make a purchase with your credit card, you'll have a grace period of 21 – 55 days before interest starts accruing. After that window, interest adds up each day and is tacked onto the following month's billing statement unless you pay off the purchase amount.
Is 34.99% APR bad?
Since the average APR for credit cards in Canada is around 20%, a 34.99% APR is considerably high – and yes, that is bad. It means you'll be charged significantly more in interest than if you made purchases with a lower-interest credit card.
What does 20% interest mean on a credit card?
A 20% credit card interest rate, or Annual Percentage Rate (APR), is the amount of interest you're charged on a purchase in one year. Keep in mind that interest is compounded daily, and the exact amount you pay also depends on how long it takes you to pay off the original charge.
Why did I get charged interest on my credit card after I paid it off?
Credit card interest accrues daily. If you paid off a balance reported a few days ago, or your money took a few business days to transfer, there could still be residual interest on your card. That's why it's so important to review your billing statements, understand your balance, and pay off purchases as soon as possible.
Is APR monthly or yearly?
Annual Percentage Rate (APR) is the nominal annual interest rate. Credit card issuers divide it by the number of days in the year to get a daily rate, then apply (and compound) that rate against your balance each day. This is how they determine how much interest to charge for each purchase you make.
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