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How Credit Card Interest Work In Canada?

Credit cards offer incredible convenience when it comes to making purchases and getting access to money.

However, it is important to know the role that interest plays in your credit card. Most people do not understand the various interest rate charges on their credit cards and end up in serious debt. Here’s a look at how credit card interest works in Canada.

What is credit card interest?

Credit card interest is the account holder’s amount of money to service the outstanding balance on a credit card account. These interest rates can range from 0% all the way up to 29.99% on an annualized rate.

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

Types of credit card interest rates

Your credit card is likely to have several different types of credit card interest rates. Here’s a look at some of the most common types of credit card interest rates.

1). Interest rates on purchases

The most common interest rate is the interest rate on purchases. Just about all types of purchases will be charged this interest rate.

Usually, you will have a “grace period” when you can pay off your purchase without having to incur any interest rate charge. This grace period can range anywhere from 15 to 30 days. Be sure to check your credit card account contract for details.

2). Interest rates on cash advances

With most credit cards, you will be able to get cash back at a point of sale or get money from an ATM. Any time you get cash from your credit card, you will be charged a special interest rate on the cash advance. This interest rate tends to be higher than the interest rate on purchases.

Therefore, you will want to 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 instance, if you execute a wire transfer with your credit, then you will be charged a special interest rate.

This interest rate will tend to be higher than an interest rate on purchases.

4). Introductory interest rate

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

The introductory interest rate is designed to spur heavy use of the card when you first get it. On most accounts, the introductory rate can range from three to six months. Therefore, it is important to pay down the balance before the conventional interest rate comes into effect.

How is credit card interest is calculated

Credit card interest rates are presented on an annualized percentage rate or (APR). However, your credit card interest rate is calculated on a prorated basis from the moment after the grace period.

For instance, let’s say that you make a $500 purchase for airline tickets. The grace period on your credit card is 20 days with an APR of 22.99%. You pay $250 of the $500 purchase without 7 days. Then you pay off the other $250 40 days after the purchase. The credit card will charge you 22.99% APR on the 20 days after your grace period on the $250. The interest rate charged will be .869% on the $250 or $2.17.

What are the typical interest rates on credit cards?

According to WalletHub, the average credit card rate is 17.87% for new offers and 14.84% for existing accounts. The interest rate on a card can change over time due to the prime rate. That means if the prime rate goes up, your interest rate can go up, even if you have a perfect on-time payment history.

How to lower your credit card interest rate?

Since your credit card interest rate can get as high as 29.99%, it is important to keep that rate as low as possible. Here are some steps that you can 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 you should do is look for a credit card that offers you a low introductory rate. Ideally, you will want to look for 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-interest rate of 0% interest rate credit card.

2). Improve your credit score

Another way to potentially lower your credit card interest rate is to increase your credit score. Your credit score is the outcome of your credit report by Canada’s two major credit reporting agencies: Equifax Canada and TransUnion Canada.

You can increase your credit score by paying all your bills on time, lowering your credit utilization, and making sure there are no delinquent notices on your account. You can request one free copy of your credit report, every 12 months, from both credit reporting agencies.

3). Request a lower interest rate

Finally, you can request a lower interest rate. A credit card company is more likely to lower your credit card interest rate if you have a stellar on-time payment history and if you use your credit card often.

Knowing your way around credit card interest

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

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