As great as rewards and perks are, credit cards also come with something called interest.

The interest rate is the “cost” of borrowing money ‒ an amount charged to the borrower for any outstanding amount of a loan.

Exactly what is credit card interest and how does it work?

When you make purchases on your credit card, that amount becomes your balance, and any balance that isn’t paid in full by your statement due date, will be charged interest.

Each time you have to make an interest payment, your credit card rewards return on spending gets smaller and smaller quickly becoming negative… trading increased rewards for increased interest payments is almost never worth it.

Types of Credit Card Interest Rates

The interest rates displayed are always on an annual basis, and can also be referred to as the Annual Percentage Rate – or the APR. That APR is then broken down and charged to you monthly whenever you don’t pay your full balance by your statement due date.

And if you have ever taken the time to look closely at your credit card’s cardholder agreement or terms and conditions, you may have noticed that there is often more than one interest rate listed.

Knowing what all these different interest rates mean, will hopefully help you avoid any surprises in the future.

Purchase Interest Rate

The purchase interest rate of a credit card is the annual interest that will be charged on any balance arising from regular purchases. Canadian credit cards most often have a purchase interest rate of 19.99%, unless you’re looking at a card that specializes in low interest or Charge Card, which is a special type of credit card that is supposed to be paid in full every month.

You are only charged purchase interest if you don’t pay your bill in full by your statement due date after the grace period. Otherwise, you get to shop with the bank’s money at no cost to you. The grace period is typically 21-25 days after your statement is finalized. However, a purchase made at the beginning of your statement period might not come due for up to 55 days after it is made.

Unfortunately, if you are late to pay or you don’t pay your balance in full, then the grace period completely disappears and you will owe interest from the very day each purchase was made (not the date your statement was finalized like you might expect).

The TD Emerald Flex Rate Visa has the lowest potential purchase interest rate right now, but the interest rate you get is highly dependent on your credit score, and if you don’t have an impeccable credit score, your interest rate still could be fairly high.

The National Bank Syncro Mastercard is another alternative with a low purchase interest rate of 8.90% (or Prime + 4%). Keep in mind that this is a variable rate, which means that when the standard prime rate in Canada changes, the interest rate should also change.

If you want the best fixed purchase interest rate (when approved), then the American Express Essential card is a safer choice.

Cash Advance Interest Rate

The cash advance interest rate is the amount a cardholder will be charged annually for any “cash-like” transactions. This percentage is often more than the purchase interest rate and will be charged for any cash withdrawals or cash advances.

You might think atm withdrawals and transferring money from your credit card to your debit card, would pretty much cover “cash-like” transactions. But these transactions also include lottery tickets, casino chips, wire transfers, money orders, and travelers cheques, so that’s something to keep in mind.

This interest rate is often higher, typically 22.99% in Canada, and is charged immediately from the day you do the cash advance. There is no grace period on cash advances.

The TD Emerald Flex Rate Visa gives cardholders the same low rate for purchases as well as cash advances, making it the credit card with the lowest possible cash advance interest rate right now.

Balance Transfer Interest Rate

A balance transfer interest rate is the amount of interest you will be charged annually if you take some of your balance and transfer it to another credit card. If this amount is not clearly stated, it is often because it is lumped in with the cash advance interest rate. Balance transfer rates are also typically 22.99% in Canada but can vary.

Introductory Promotional Interest Rates

Sometimes credit cards will offer new cardholders introductory interest rates. These rates are often for balance transfers and are called “balance transfer promotions.”

These promotions allow you to take your existing high interest debt and transfer the balance to your new credit card at a temporary, but extremely low, interest rate.

When done correctly, these introductory balance transfer rates could really help you get your credit card paid off faster (so you can save money on interest payments).

The MBNA True Line Mastercard and the MBNA True Line Gold Mastercard both offer a 0% balance transfer interest rate for 6 months. When your 6 months are up, your purchase and balance transfer interest rates will only be 12.99% and 8.99%.

Compare the top promotional balance transfer cards right here.

Penalty Interest Rates

As if 20% interest wasn’t enough, many cards will also increase that amount if you have the habit of missing credit card payments. Banks will often give you one free pass ‒ but after that, they will begin penalizing you.

This is usually the highest interest rate you will see in your cardholder agreement, and is often close to 30%.

Hopefully, you will never find yourself paying this soul-crushing penalty interest rate, but if you do, be more diligent about paying your bills on time. If you’re able to show the bank that you can pay on time, then after some time, they will usually agree to put your interest back down to the lower rate.

You can avoid penalty interest rates by always paying your minimum balance before the statement due date even if you can’t afford to pay the entire bill. Paying that $10 on time is completely worth it!

Variable Interest Rates

Some low interest credit cards will give you an interest rate based on the Canadian Prime Lending Rate. Because of this, the interest rate for a variable interest will changed any time Prime changes.

Credit cards that are based on prime, are also often based on your personal credit score, so if you have an excellent score, you could also get a very low interest rate.

Fixed Interest Rates

Most credit cards have a fixed interest rate. Fixed interest rates will often stay the same. However, it’s always good to check the fine print. Because despite having a fixed interest rate, there are some circumstances that could cause you to have to pay a higher interest rate (ie: Penalty Interest rates).

Quick FAQ

Are interest charges applied right away?

Although not required by law, most credit cards will give cardholders an interest-free “grace period” on all purchases providing you do not have a revolving balance on your card.

Credit card companies take the grace period into account ‒ and as long as you pay your balance in full by the time your statement says your payment is due, you will never be charged any interest.

Sure, 21 days sounds nice, but interest will be charged from the day you made the purchase. So, if you do miss your payment? You will get dinged from the purchase date, not from the missed payment date.

But here’s an exception…

Any cash advances or balance transfers you make have no grace period. So, if you’re hoping to get away from one of these transactions with as little interest as possible, don’t wait for your statement – just pay this off as soon as you can.

How much interest will I be charged?

While a 19.99% interest rate seems pretty straightforward, that is an annual interest rate. In practice, however, credit cards will charge you on a monthly basis.

If you happened to miss paying your credit card off, and you’re facing an interest payment ‒ you may be curious how to find out how much interest you will be charged. This should help:

Step One: Find your Daily Interest Charge

19.99% interest rate / 365 days in the year = 0.055% daily interest charged

Step Two: Find out the Daily Amount Charged

0.055% daily interest charge * $1000 credit card balance = $0.55 daily charge

Step Three: Find out your monthly charge.

$0.55 daily charge * 30 days in the month = $16.50 in monthly interest fees.

Calculate Your Exact Interest Payment Here

Keep in mind, any month where you are unable to pay your balance in full, you will still be expected to pay minimum payment.

What does the ‘Minimum Payment’ consist of?

The minimum payment is the amount your credit card insists that you remit to them each and every month so that you are meeting the terms of your agreement (or loan) with them.

If you do not pay at least the minimum payment on time, then you are in breach of your contract which will get reported to the credit bureaus and damage your credit score.

The actual amount of the ‘Minimum Payment’ a credit card requires you to pay every month depends on the card itself.

For some cards, like the , the minimum payment is $10 plus any interest and fees.

For others, like the , the minimum payment required is $15 or 1% of your balance plus interest.

Be sure to read your cardholder agreement to find out exactly what your credit card uses to make up the minimum payment.

However, because the minimum payment only covers a small bit of your actual balance, we always suggest that if you can’t pay off your entire credit card balance, you pay more than the minimum amount. If you only ever pay the minimum payment, you’ll likely never fully pay off your credit card.

What happens if I only pay the minimum payment?

If you have credit card debt and you’re only paying the minimum payment, then you’re probably unsure how long it will actually take you to pay it all off…

If so, we’re about to give you some hard truth.

Let’s say, for example, that you have credit card that is maxed out at $2,000, and your card’s minimum payment consists of $10 plus interest.

Month Payment Interest Paid Principal Paid Interest Remaining
1 $43.32 $33.32 $10 $1,990
2 $43.15 $33.15 $10 $1,980
3 $42.99 $32.99 $10 $1,970
4 $42.82 $32.82 $10 $1,960
5 $42.65 $32.65 $10 $1,950
6 $42.49 $32.49 $10 $1,940
7 $42.32 $32.32 $10 $1,930
8 $42.15 $32.15 $10 $1,920
9 $41.99 $31.99 $10 $1,910

If you’re doing the math along with us, a quick calculation will show you that if you have a $2,000 debt and you’re only paying $10 of principal every month, that debt is going to be hanging over your head for around 200 months.

Yes, you read that right! Paying the minimum payment on a $2,000 credit card, means that you will be paying for that shopping spree for 16 years and 7 months. Plus, when you add up all the interest payments you make, that $2,000 ends up costing you over $5,300! $3,300 more than you were planning on spending.

Pay it off 5x faster

If you can increase your monthly payment by $40 a month, that means that $50 will be going towards your principal.

$2,000 in debt / $50 payments = 40 months.

Just by increasing your payment every month by $40, means that you will be able to get your card paid off 5x faster.

Lowest interest rate credit card

We all know that things happen, situations change, and you might have found yourself making interest payments month after month ‒ a balance transfer credit card could be a good option.

The best balance transfer credit card on the market right now is the ‒ which give you 10 months of 1.99% balance transfer interest.

Permanent low interest rate

Alternatively, if you’re looking for a card with a permanent low interest rate, then the Amex Essential is the best no fee option available.

The bottom line

Research the options that makes the most sense for you.

And remember, no rewards is worth the heavy load of credit card debt.