How Does Credit Card Interest Work in Canada? (2025 Update)

This article is by Paul Murphy, our VP and financial literacy expert with 15+ years of investment and banking industry experience.

If you’ve ever floated a balance on a credit card, you’ve likely asked yourself: how does credit card interest work in Canada?

The basics seem simple. You borrow money from the credit card company. If you don’t pay it back, you are charged monthly interest.

But there are many factors, especially if you are in credit card debt, which makes it very important to understand how credit card interest.

For example, what if you only pay half the balance back? How is the interest calculated then? Or, what about new purchases? Do new purchases accumulate interest right away?

Most people don’t know that credit card companies actually charge interest on a daily, not monthly or yearly, basis. This compounds each day and you won’t touch the principle until you pay down the interest. And there begins the debt cycle.

I want to explain how credit card interest works in Canada. My hope is that you’ll see that it can be extremely dangerous to your financial future.

How credit card interest is calculated in 2025

The average rate of interest on credit card debt is approximately 19%, with many as high as 29.99%.

Interest is usually shown as an annual percentage rate and is a fee paid for borrowing money so you can spend money today to purchase things you would normally have to save for.

Credit cards have become an integral part of how we spend money and have become completely integrated with our day-day lives and have provided us with an extremely convenient way to spend money.

But they also have made credit readily available and created a culture of buy now and pay later.

Are credit card interest rates monthly or yearly?

Although interest is shown as an annual percentage rate (APR), credit card interest rates are NOT monthly or yearly. Credit card interest accumulates on a daily basis after the grace period (typically one month).

Credit cards actually charge interest daily, not monthly

Most people don’t realize exactly how the compound interest on their credit card is calculated and credit card companies rely on that fact.

Compound interest basically means that interest charges are added to the principal borrowed so you are then paying interest on the interest and the debt very quickly grows.

Most people know what their credit cards APR (Annual Percentage Rate) is. The APR gives you the approximate percentage you will pay in interest over the course of one year. However, most credit cards compound interest on a daily basis.

Let’s look at an example as to how this impacts what you payback.

You have $5,000 on your credit card, and your APR is 19%.
This means the daily interest rate is 0.052% (19%/365 days).
Multiply $5,000 by 0.052% and you get $2.60.
This means your interest is $2.60 on the first day.

Doesn’t seem so bad you might say.

However on the second day, your balance is now $5002.60, so on the second day, you pay 0.052% on the new balance of $5002.60 and so on and so forth. You would keep paying interest on the interest until you had paid it off.

Now, it’s not all bad. Credit card companies allow you a ‘grace period’ during which you can pay back the borrowed amount with zero interest.

The grace period is set by the credit card provider and is usually between 21 days to 30 days.

Unfortunately, a lot of people using their credit cards do not have the financial capacity to pay the borrowed amount in full during the grace period and credit card companies rely on this.

What if you just make the minimum payments?

The minimum payment is the smallest amount you can pay each month without going into default and then potentially incurring a late fees or having a negative impact on your credit rating.

Your minimum payment is applied towards that month’s interest charges and then the remaining amount, which – will be very low if you are only making the minimum payment – is applied to the principal (the amount originally borrowed).

Making minimum payments will keep the card in good standing and help protect your credit rating but you will end up paying far more than the cost of your purchase.

Regulation has now made credit card companies add a warning to your credit card statement showing how long it will take you to pay off the balance if you make only minimum payments.

Take a look on your statement and you will be shocked!

They put a warning on cigarette packages because they are a serious danger to your health and in the same way they have added a warning on the credit card statements as they can be a serious danger to your financial well-being.

How long will it take you to pay off debt with minimum payments?

Let’s start with a practical scenario that shows the impact of paying only the minimum payment each month on your credit card balance:

Imagine you have a credit card balance of $5,000 with an annual percentage rate (APR) of 18%. Credit card companies typically calculate the minimum payment as 2% of the outstanding balance or $25, whichever is greater. In this case, your initial minimum payment would be $100 (2% of $5,000).

Month 1:

Balance: $5,000
Minimum Payment: $100
Interest for the Month: (18% annual rate / 12 months) * $5,000 = $75
Principal Payment: $100 (min. payment) – $75 (interest) = $25
After the first month, you’re left with a balance of $4,975.

Fast-forward to Month 12:
Assuming you make no additional purchases and continue to pay only the minimum payment, here’s how your debt balance would look by month 12.

For simplification, let’s say the minimum payment slightly decreases as you pay down the balance, but stays roughly around $100 initially adjusting gradually due to reduced principal.

Month 12:

Approximate Balance: $4,840
Interest for the Month: Around $72.60
Principal Payment: Slightly more than $27

Be honest, by month 12, would you have expected more to be paid off the principal amount?

By paying only the minimum, you’ll find yourself paying interest on top of interest, causing the balance to dwindle much slower than expected.

Here’s the irony: it might take over 15 years to pay off the entire balance in full with consistent minimum payments, with accrued interest accumulating thousands of dollars beyond your original purchase amount.

How to avoid paying interest on credit cards in 2025

Avoiding interest on credit cards requires careful management and planning. Here are some strategies you can use to avoid paying interest:

Pay in Full Each Month: The most effective way to avoid interest is to pay off your entire balance by the due date each month. You won’t be charged interest on new purchases. Paying in full during the grace period stops interest rates from being applied.
Understand the Grace Period: Most credit cards offer a grace period, typically lasting 21-25 days from the end of your billing cycle. If you pay your balance in full by the due date, you won’t accrue interest on purchases.
Set Up Automatic Payments: To ensure you never miss a payment, set up automatic payments from your chequing account. Automate the full balance to save on interest. You can also automate the minimum payment to avoid late fees and protect your credit score.
Track Your Spending: Keep a close eye on your credit card spending through banking apps or personal finance software. This ensures you don’t overspend and end up unable to pay your full credit card balance.
Create a Budget: Having a budget helps you manage expenses and ensure that you’re not spending beyond your means. Stick to your budget to avoid accumulating credit card debt.

Should you use a cash advance to pay down credit card debt?

A cash advance is when you use your credit card to withdraw cash from the automatic bank machine or write a cheque the credit card company conveniently provided.

Obtaining cash from your credit card usually incurs a higher interest rate and there’s no grace period so the daily compounding interest begins immediately at the higher rate on the amount you have withdrawn.

So as a way to get out of debt, it’s not a good strategy. We don’t recommend using a cash advance to pay down your credit card debt.

Transferring your balance to a new card

You have seen and no doubt been tempted to get a new credit card with a lower introductory rate if you transfer your current credit card balance.

This certainly could work for you if you:

Have a plan and the discipline to not increase the balance on the new card
Cut up or stop using the card you have just transferred the balance from
Aggressively pay down the amount owed versus making the minimum monthly payment.

The first thing to check before transferring the balance is the length of time the low-interest introductory offer lasts and if you think you can realistically pay down the majority of the debt during that period.

Then you need to understand what the rate will be when the introductory offer is over and estimate what your balance will be at that time.

The standard rate on the new card may be greater than the old card and ultimately cost more in the long run…plus you need to confirm if there are any transfer fees or additional costs.

Remember, if you use the new card, new purchases made will be charged at the standard interest rate as the introductory rate is only for balance transfers. Any payments you make will be applied to the amount transferred not the new purchases.

Did I miss anything? Any other questions about how credit card interest works in Canada? Leave your question in the comment section and I’ll respond.

Forewarned is forearmed!

Other resources to help you:

Debt Question and Answer Forum

The 50 Most Effective Ways to Get Out of Debt

A True Debt Story – “I’m Losing My Business”

Debt Consolidation Versus Consumer Proposals?

A Guide to Debt Consolidation for Canadians

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You can find experts by searching in your city. We also have offices across Canada, which you can talk to on the phone, email, or meet in-person.

What does an expert know that you don’t? They will teach you about debt restructuring options such as debt consolidation, consumer proposals, informal proposals, and how to approach your creditors with a restructuring offer.

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And finally, here are real stories about debt from Canadians who survived their financial crisis.

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