Understanding Credit Card Interest

APR stands for Annual Percentage Rate. It’s the yearly cost of borrowing money, expressed as a percentage. Canadian credit cards often show a purchase APR of 19.99%, 20.99%, or higher.

What it means: If you had a $1,000 balance for a full year and never paid it off, at 20% APR you’d pay roughly $200 in interest over that year. In practice, interest is calculated more frequently (usually daily), so the amount can vary slightly.

Different APRs on the same card: - Purchase APR: Applies to normal purchases (and often to balance transfers after a promo ends) - Cash advance APR: Usually higher (e.g. 22–28%) and often has no grace period—interest starts immediately - Balance transfer APR: May be 0% for a promo period, then switches to the standard purchase or a specific balance transfer rate

Always check your cardholder agreement for the exact rates that apply to your account.

Most Canadian issuers use a daily periodic rate and compound interest daily.

Formula: Daily rate = APR ÷ 365. So 20% APR ≈ 0.0548% per day.

Example: $1,000 balance at 20% APR: - Day 1: $1,000 × (0.20 ÷ 365) ≈ $0.55 interest - That interest is added to the balance, so the next day interest is calculated on $1,000.55, and so on.

Over a month, that can add up to roughly $17–18 in interest on $1,000. Over a year with no payments, you’d owe about $1,200 (compound growth).

Why it matters: The longer you carry a balance and the higher the balance, the more interest you pay. Paying off the full balance each month avoids this entirely.

The grace period is the time between your statement date and your payment due date—typically 21 days in Canada for new purchases. If you pay the full statement balance by the due date, you usually aren’t charged interest on those purchases.

If you don’t pay in full: Interest is typically charged on the average daily balance (including new purchases) from the day each purchase posts. There’s no grace period on the portion you didn’t pay.

Cash advances: There is usually no grace period. Interest starts the day you take the cash advance and often at a higher APR. Plus, there’s often a cash advance fee (e.g. 3–5% of the amount). That’s why cash advances should be avoided except in real emergencies.

The minimum payment is the smallest amount you must pay by the due date to keep the account in good standing. It’s often calculated as a percentage of the balance (e.g. 2–3%) or a minimum dollar amount (e.g. $10), whichever is higher.

The trap: If you only pay the minimum, most of your payment goes to interest, not principal. So the balance shrinks slowly and you stay in debt for years.

Example: $5,000 balance at 20% APR, minimum ~2%: - Minimum payment ≈ $100/month - Time to pay off: 9+ years - Total interest: $6,000+

Rule of thumb: Pay as much as you can above the minimum—ideally the full statement balance—to avoid or eliminate interest and get out of debt faster.

1. Pay the full statement balance by the due date. That’s the only way to use a standard card and pay zero interest on purchases.

2. Set up autopay for at least the statement balance so you never miss the due date.

3. Avoid cash advances. Use an emergency fund, line of credit, or other lower-cost option if you need cash.

4. If you already have a balance, prioritize extra payments (see our guide on paying off credit card debt) or consider a 0% balance transfer to give yourself a window of zero interest while you pay down the principal.