How Credit Card Interest Rates Work in Canada

If you have a credit card, you’ve likely thought about your interest rate. It’s the fee you pay to use certain aspects of your credit card, like making everyday purchases or getting a cash advance. How much interest you’ll pay depends on how you use your card and the size of your transactions. That’s why it’s so important to understand how credit card interest rates work in Canada.

What are some typical credit card interest rates?

The most common interest rate associated with credit cards is the purchase rate, which applies to regular spending with your card. That interest rate can vary depending on the type of credit card, but usually falls within these ranges:

• Low-interest cards: 0%-13%
• Rewards cards: 20%-22%
• Charge cards: 30%

Low-interest credit cards have the lowest rates, as their name suggests, but they typically don’t come with many other perks. Rewards cards often charge interest rates around 20%. Charge cards generally have the highest interest rate, which functions as a penalty because they’re designed to be paid off in full each month.

If you always pay your bill in full each month, you won’t actually pay any interest. However, it’s still important to know your interest rate in case of a financial emergency.

» MORE: How to calculate how much interest you’ll pay

Types of credit card interest rates

If you’ve ever looked at your cardmember agreement, you’ve likely noticed different interest rates for different types of transactions. Knowing what you’ll be charged can help you make smarter financial decisions.

Purchase interest rate

This is how much interest you’ll pay on everyday purchases. Most Canadian credit cards have a purchase interest rate of 20%-22% if you don’t pay your bill in full by the due date. You do get an interest-free grace period of at least 21 days after the end of your billing period, but if you miss that deadline, you’ll be charged interest from the day you made the purchase.

Cash advance interest rate

Many credit cards allow you to withdraw money from ATMs. This is called a cash advance, and it comes with an interest rate that’s typically higher than the one applied to purchases. It’s worth noting that lottery ticket purchases, wire transfers, and gambling site transactions are also considered cash advances, so you’ll pay this higher interest rate.

Balance transfer interest rate

Some credit cards allow you to move your balance over from another card. This offer is handy for people who don’t want to juggle payments on multiple cards, or who want to move their debt to a lower-interest card to save money. The balance transfer rate may be similar to the rate for cash advances or lower. However, check whether you’ll also be charged a fee if you transfer a balance.

Promotional interest rates

Many low-interest credit cards offer a promotional interest rate for balance transfers. If you’re carrying a balance on a card with a higher interest rate, you can take advantage of a promotional rate to transfer your balance to a lower-interest card. For example, a card may offer a 1.99% interest rate on balance transfers for nine months (although you should also check for any extra fees).

Penalty interest rates

Most credit cards will apply a penalty or default interest rate if you have a history of missing payments. In most cases, you’ll be allowed to miss one payment without seeing your rates go up. However, if you miss two payments within a certain period, like 12 months, your interest rates will increase. You can avoid these penalty interest rates by making at least the minimum payment each month.

How can I lower my credit card rate?

Interest rates are determined by the credit card provider and are non-negotiable. What’s outlined in the terms and conditions of your cardholder agreement is what you’ll pay. But while you can’t change the interest rate itself, you can take a few steps to reduce how much interest you pay:

• Always pay your bill in full. If there’s no balance, there’s nothing for the provider to charge interest on.
  If you can’t pay the whole bill, pay more than the minimum payment. This reduces the balance on which you’ll be charged interest.
• Don’t wait until your bill is due. Make payments throughout the month to reduce your average daily balance.
• Avoid cash advances and similar transactions, like buying lottery tickets and making wire transfers.
• Apply for a low-interest credit card.
• Take advantage of any promotional interest rates for balance transfers and aim to pay off your balance during the promotional period.

Now that you understand how credit card interest rates in Canada work, you can make strategic decisions about what type of credit card to get and how to use it.

» MORE: How to choose the best credit card for you