Credit Card Interest in Canada. How Does it Work?

Updated: Aug 30, 2022

Advertiser Disclosure

Have you ever asked yourself just how credit card interest works in Canada? If the answer is no, there is a lot to cover here. Many people turn to credit card solutions as the best way out of their financial perils. While it’s true that different credit cards offer a wide range of different financial benefits, perks, and rewards, these little pieces of plastic also come with many downsides, an essential being interest. The interest involves a rate at which the cost of using a credit card is calculated.

In other words, the interest rate is an additional fee the cardholder pays for the privilege of borrowing the money that they don’t have. The fee is any amount charged to the cardholder for a loan they borrowed. Let’s delve deeper into how credit card interest works, the factors that influence it, different types, as well as all other things you should know about credit card interest in Canada.

How Does Credit Card Interest Work in Canada?

Each credit card comes with a unique, average rate of interest on credit card debt. The rate varies from card to card, from bank to bank. The rate is usually expressed as an annual percentage rate (APR) in the form of a fee that a cardholder pays for borrowing the means to spend them to go about their daily financial needs, without having to break a budget or save for, before purchasing.

Credit and debit cards have become an integral part of how people deal with their finances, providing an extra level of convenience and financial stability. That’s why interest rates are now one of the hottest topics in this newly established “buy now and pay later” culture. One thing is for sure – credit cards have made credit readily available but not without a cost. Each time a cardholder makes a purchase using their credit card, the amount spent becomes their new balance. In other words, it becomes a debt. If the debt isn’t paid when the due date comes, a cardholder pays interest.

While this doesn’t sound like something worthy of being worried about, in particular, it does give way to an entire cascade of events. For example, if you keep failing to pay your balance in full by your statement due date and get charged with interest, this type of irresponsible behavior leads to more fees. Making interest payments turns your rewards into negative points. Instead of receiving rewards as a return on spending, you’re actually receiving increased interest payments and penalty fees.

Factors Affecting Credit Card Interest Rates & Fees in Canada

Some credit card issuers allure cardholders with low introductory rates only to apply the real, higher rate later on. Other credit card issuers have other ways to attract consumers. While prime rates are near a record low nowadays, there are still plenty of cardholders who can’t understand why their credit card interest rates are so high. To understand this, we have to delve deeper into different driving factors that influence Canada’s credit card interest rates.

Grace Period

The grace period refers to a period of time that is free of interest from purchase to payment. The terms depend on the type of card and the card issuer. As long as the cardholder pays the balance in full, they are free to purchase and pay with the card, enjoying an interest-free period. Most Canadians pay their balance in full every month and receive a reward in return – free short-term financing. In case that the user fails to pay their monthly balance dues and carry the balance to the next month, they get charged with costly interest.

No Collateral

Certain card issuers issue unsecured credit cards without asking the cardholder to give anything in return as collateral. Since this poses a higher risk for the issuer, such cards are usually associated with a higher interest rate to recoup for some of the costs. There is a reason why mortgages look cheaper than unsecured credits – the collateral or your house. The moment you fail to pay your dues, the bank can foreclose on your collateral to recover the loan value in full. The issuers will hardly recover the funds if you fail to repay the outstanding credit card balance.

Processing Costs

There is a range of costs associated with operating the credit card system, such as processing transactions at huge volumes and providing value-added rewards programs. Technological solutions used to collect payments, prepare, and send statements via email, and support transactions are constantly updated.

In an average cardholder’s eyes, using a credit card comes down to either tapping or swiping their card. However, there is an entire world underneath that makes their purchase approved.

Since every card issuer’s main goal is to reduce fraud, they are required to come up with new credit card solutions constantly. These security advancements aren’t for free, someone has to pay for them, and who is better than the cardholders.

Fraud Prevention

Fighting both customer reimbursement and fraud can be quite costly. In case a cardholder becomes a victim of fraud, they have zero liability. While it’s true that most credit cards come with zero-liability protection, the losses of credit card frauds have to be eventually mitigated. That’s why the majority of the most reputable card issuers apply such high-interest rates.

6 Types of Credit Card Interest Rates in Canada

We already mentioned that the interest rates are always calculated on an annual basis and expressed in cardholders’ balances as the APR. The card issuers break the APR down and charge monthly whenever their consumers fail to cover the full balance by their statement due date. The thing with cardholders and credit card interest rates is that very few of them ever bother to take a closer look at their credit card’s cardholder terms and conditions or agreement.

If they did, they’d probably notice that there is much more than meets the eye when it comes to interest rates listed. That’s where the key to understanding what different interest rates mean. Fortunately, we took some time to narrow it down for you, hoping that this knowledge can help you avoid overwhelming your budget with unnecessary expenses.

1. Purchase Interest Rate (PIR)

By making regular purchases, cardholders generate a balance. Card issuers charge an interest rate for any balance on an annual basis, and this rate is what is known as the purchase interest rate (PIR). There is, pretty much, one purchase interest rate that applies to all Canadian credit cards except when it comes to charge cards or low-interest cards. It’s a special type of credit card that requires the user to cover the full balance monthly. If you pay your bill in full and on time, you won’t be charged with PIR. The trick to avoid PIR is to pay your full balance by the statement due date the moment the grace period has expired.

This period typically ranges between 3 and 4 weeks from the finalization of your statement. But here is the trouble – all purchases made at the beginning of your statement period can show up on your balance for up to 55 days after they are made. The grace period can be canceled if you don’t cover your debt in full or are late with payments. If this happens, the interest will be charged per each purchase from the moment they were made.

2. Cash Advance Interest Rate (CAIR)

If a cardholder makes any cash-like transactions, such as withdrawing money from the ATM, they will be charged annually with the cash advance interest rate. Any cash advances or withdrawals include this percentage fee. The most common cash-like transactions are money transfers to your debit card and ATM withdrawals.

However, Traveler’s checks, money orders, wire transfers, casino chips, and lottery tickets also count as cash-like transactions, and each of these actions involves a fee. Canada has a high CAIR rather so, keep your spending in check. Keep in mind that cash advances don’t fall under the grace period.

3. Balance Transfer Interest Rate (BTIR)

If you want to transfer your balance to another credit card, you will be charged with an annual BTIR. BTIR also has the introductory promotional interest rate that is usually offered to new cardholders. This interest rate is mostly associated with balance transfers and is also known as balance transfer promotions. It’s almost like a benefit, and it applies to those new cardholders who apply for a new credit card with the goal of transferring their existing high-interest debt to a new card at a much lower interest rate over a short period of time.

Now, if your goal is to get out of your credit card debt abyss by paying it off faster, these introductory balance transfer rates might just be the way. However, be advised that saving money on interest payments requires responsible financial behavior and credit card interest rate savviness.

4. Penalty Interest Rates

Now, here’s the most painful part that requires your special attention. We mention responsible financial behavior so much because it allows cardholders to avoid paying hefty penalty interest each time they miss credit card payments. The majority of card issuers give their consumers one free pass before they start penalizing them. The penalty rate is, without a doubt, the highest interest rate of them all, as you can see in your cardholder agreement. Just pay your dues on time to avoid paying penalty interest rates as it’s quite hard to get things back to normal. To make sure you avoid these rates, pay your minimum balance before the statement due date.

5. Variable Interest Rates

Some credit card issuers apply the Canadian Prime Lending Rate to their credit card offerings, and these cards come with low-interest rates. However, it’s very important to keep an eye on these low rates as they change each time the Prime rate changes.

6. Fixed Interest Rates

Almost every credit card has a fixed interest rate, which includes a fee that’s always, pretty much, the same. However, always check the fine print of your agreement as there are certain situations where a fixed interest rate can go up due to newly developed circumstances. In terms of your finances, a credit card fixed rate is a single, unchanging fee a cardholder gets charged with for making purchases.

The Best Low-Interest Credit Cards in Canada

If you’re a type of cardholder who carries some debt monthly and looking for a convenient way to pay off a balance, the best choice at hand is getting a low-interest credit card. Consider the following Canadian fixed-rate cards:

Variable Rate Cards

These cards don’t include fixed interest rates but rather a variable rate charged on any balance a cardholder fails to pay. These cards are up the alley for all with excellent credit score and looking for great balance transfer promotions. Consider the following cards:

How Do You Avoid Paying High Interests on Canadian Credit Cards?

Credit card responsibility is an essential thing to take into consideration. A credit card can be an extremely convenient, beneficial, and useful financial tool in the right hands. However, it takes responsibility to use it properly. If you pay your bills in full monthly, a credit card can help you build an excellent credit history and manage your short-term finances more effectively. With that in mind, we took some time to gather a few useful tips that should help you develop the right level of financial and credit card responsibility.

 1. Avoid Purchasing on Impulse

A lot of credit card users are prone to making impulse purchases. Since a credit card gives them a certain sense of financial security and stability, they easily forget about their debts and charge purchases on an impulse. They’re not that card-happy when their statements arrive. A credit card is only a means of managing your cash-flow, so don’t spend more than you can pay off in full.

 2. Pay Your Bills in Full and Keep a Clear Balance

Paying your balance in full is the only way to avoid paying hefty interest rates. Carrying a credit card balance is something that you don’t want in your life. Since paying only the minimum payment is a sure way to start carrying a balance, aim to keep a clear balance by paying your debts off in full.

RELATED: Why having a reliable banking provider is important.

 3. Know Your Interest Calculations

Becoming entirely debt-free is a tedious and long process, but you can significantly shorten it by getting on top of your interest calculations. If you have to carry a balance, you can save on interest by making payments as soon as possible. Any outstanding balance automatically involves interest.

 4. Work on Your Credit History

Building a solid credit history takes time, but knowing how to use your credit card can be extremely helpful. Most lenders reward responsible behavior, which is why it’s so important to pay off your balance in full monthly. Any delays in making payments can only damage your credit score.

 5. Avoid Taking Cash Advances

While most cardholders view carrying a balance as something expensive, that’s nothing compared to fees for cash advances. These are among the costliest credit card transactions. A cash advance interest rate gets charged from the moment a cardholder took the advance until the moment it’s repaid in full. Regular purchases have the 21-day grace period, which is not the case with cash advances.

Hence, the hefty interest rate. Avoid cash advances at all times, unless it’s a real emergency. If that’s the case, we recommend having a backup plan for afterward. The best way to use your credit card is for making purchases as many retailers and vendors give various discounts, rewards, etc. Also, review your statement regularly to keep your spending under control.

Bottom Line

As you can see, there is a lot to consider when making efforts to understand credit card interest in Canada. Canada offers a wide range of different credit card options, and the best way to make the most with what you have is to research all the options that sound the best to you. Keep in mind that using a credit card involves a level of financial responsibility as you don’t want to burden yourself with the shackles of carrying a credit card debt.


MarketProSecure® Canada requires authors and content creators to use primary sources to support their work. These include original data, government information, white papers, and interviews with industry experts. We also reference unbiased original studies from other reliable writers where appropriate.

  1. “What is APR?
  2. E. Thomas Garman; Raymond Forgue (2014). Personal Finance. p.198.


Advertiser Disclosure

MarketProSecure® Canada website supports advertisements and receives compensation from certain credit card issuers and advertisers. The partnership with a few financial product providers results in the coverage of their credit or debit related products. The content on the website is not provided or commissioned by any credit card issuers. The advertiser relationships do not affect the ratings and reviews nor our Best Card Picks. MarketProSecure® Canada makes an effort to provide accurate information. Clicking on the "Apply Now" button will present the most up-to-date information from the credit card issuer regarding the terms and conditions, rates, and fees. MarketProSecure® Canada may receive a commission from product providers and credit card issuers. Editorial Guidelines provides the full list of these issuers.