How Credit Card Interest Works in Canada?

Credit cards are incredibly convenient when it comes to making purchases and accessing money.

However, it’s important to understand the role interest plays when it comes to your credit card. Most people don’t understand the different interest rates applied to their credit cards and end up heavily in debt. Here’s an overview of how credit card interest works in Canada.

What is interest on credit cards?

Credit card interest is the amount of money the account holder pays to settle the outstanding balance of a credit card account. These interest rates can range from 0% to 29.99% on an annualized rate.

On many credit card accounts, these interest rates can vary based on several factors, including the prime rate, the type of purchases and transactions made, and the account type.

Types of Credit Card Interest Rates

Your credit card likely has several different types of credit card interest rates. Here’s an overview of the most common types of credit card interest rates.

1). Interest Rate on Purchases

The most common interest rate is the purchase interest rate. This interest rate applies to almost all types of purchases.

Generally, you have a “grace period” during which you can repay your purchase without having to pay interest. This grace period can range from 15 to 30 days. Check your credit card agreement for details.

2). Cash Advance Interest Rate

With most credit cards, you can get cash back at a point of sale or withdraw cash from an ATM. Whenever you withdraw cash from your credit card, you must pay a special cash advance interest rate. This interest rate tends to be higher than the purchase interest rate.

So, you should be careful when taking cash advances on your card.

3). Interest on Cash-Like Transactions

There may also be a special interest rate on cash-like transactions on your credit card. For example, if you make a bank transfer with your credit, you will have to pay a special interest rate.

This interest rate will tend to be higher than the purchase interest rate.

4). Introductory Interest Rate

When you open a credit card account, you may benefit from an introductory interest rate. This interest rate will generally be significantly lower than the regular interest rate. In some cases, this introductory rate can be 0%.

The introductory interest rate is designed to encourage heavy use of the card when you first get it. On most accounts, the introductory rate can be in effect for three to six months. It is therefore important to pay off the balance before the conventional interest rate comes into effect.

How credit card interest is calculated

Credit card interest rates are presented as an Annual Percentage Rate (APR). However, your credit card interest rate is calculated proportionally from the moment the grace period expires.

For example, let’s say you buy airline tickets for $500. Your credit card’s grace period is 20 days with an APR of 22.99%. You pay $250 of the $500 purchase within 7 days. Then, you pay the remaining $250 40 days after the purchase. The credit card will charge you an APR of 22.99% for the 20 days following your grace period on the $250. The interest rate applied will be 0.869% on the $250, which is $2.17.

What are the usual credit card interest rates?

According to WalletHub, the average credit card rate is 17.87% for new offers and 14.84% for existing accounts. A card’s interest rate can vary over time depending on the prime rate. This means that if the prime rate increases, your interest rate may increase, even if you have a perfect and timely payment history.

How to lower your credit card interest rate?

Since your credit card interest rate can go up to 29.99%, it’s important to keep it as low as possible. Here are some steps you can take to keep your credit card interest rate as low as possible.

1). Find a credit card with a low or 0% introductory interest rate

The first thing to do is to look for a credit card that offers a particularly low introductory rate. Ideally, you should find a credit card that offers a 0% introductory rate.

If you have a credit card with a higher interest rate, you can transfer the balance from the high-interest credit card to the low or no-interest credit card.

2). Improve your credit rating

Another way to potentially lower your credit card interest rate is to increase your credit score. Your credit score is the result of your credit report by Canada’s two main credit bureaus: Equifax Canada and TransUnion Canada.

Vous pouvez améliorer votre cote de crédit en payant toutes vos factures à temps, en réduisant votre utilisation du crédit et en vous assurant qu’il n’y a pas d’avis d’arriéré sur votre compte. Vous pouvez demander une copie gratuite de votre dossier de crédit, tous les 12 mois, aux deux agences d’évaluation du crédit.

3). Ask for a lower interest rate

Finally, you can ask for a lower interest rate. A credit card company is more likely to lower your credit card interest rate if you have an excellent history of on-time payments and frequently use your credit card.

Navigating credit card interest

A good basic understanding of credit card interest rates will allow you to make smarter purchases and stay on top of your credit card payments. Be sure to carefully check the interest rates on your current credit card. Your wallet will thank you.

Frequently Asked Questions about how credit card interest works in Canada

Here are frequently asked questions in the milesopedia community about this card.