Card interest has three parts: your yearly rate, what you owe each day, and the number of days. Once you know them, you can see what a balance costs and how to keep that cost at $0.
When you pay no interest
New purchases come with an interest-free period. Card issuers regulated by the federal government must give you at least 21 days between your statement date and your due date.
Pay your full statement balance by the due date and those purchases cost nothing extra. If you’re not sure which balance that is, see statement balance vs current balance.
How the bank works out your interest
When you carry a balance, your bank turns the yearly rate on your statement into a daily rate. Scotiabank, for example, divides the yearly rate by 365, or 366 in a leap year.
- Daily rate: the yearly rate divided by 365. At 20.99%, that’s about 0.0575% a day.
- Average daily balance: what you owed on each day of the statement, added up, then divided by the number of days.
- Interest: the average daily balance, times the daily rate, times the days in the statement.
Owe $1,000 for one month
- Average daily balance
- $1,000.00
- Daily rate (20.99% ÷ 365)
- 0.0575%
- Days in the statement
- 30
- Interest for the month
- $17.25
At 20.99% a year, with the balance the same all 30 days. Your bank uses your real balance on each day.
Interest builds up each day, but it’s added to your balance once a month, on your statement date.
Pay less than the statement and the grace period ends
Pay less than your full statement balance, even a few dollars less, and you pay interest on those purchases from the day you made them. The 21 days no longer protect them.
With many cards, new purchases then start costing interest right away until you pay your balance in full again. Your card agreement says how yours works.
Interest on interest
Interest you don’t pay joins your balance on the next statement. The month after, you pay interest on that interest too. That’s why a balance shrinks so slowly when you pay only the minimum.
Pay $60 a month
- Balance
- $2,000
- Payment
- $60 a month
- Paid off in
- 3 years, 11 months
- Interest
- $793
At 18% a year. Example from the Financial Consumer Agency of Canada.
Pay $160 a month
- Balance
- $2,000
- Payment
- $160 a month
- Paid off in
- 1 year, 2 months
- Interest
- $231
At 18% a year. Example from the Financial Consumer Agency of Canada.
Paying $100 more a month saves $562 and clears the card 2 years and 9 months sooner.
Cash advances and balance transfers
Cash advances, balance transfers and things your bank treats like cash have no interest-free period. Interest starts the day you take the money and runs until you pay it back.
They often cost more too. In the government’s example, a card charges 19% on purchases and 22% on cash advances, and a cash advance fee may apply on top. A balance transfer with a 3% fee costs $30 on $1,000, and interest still applies.
When you have more than one rate
One card can hold balances at different rates, for example purchases at one rate and a cash advance at a higher one. Your minimum payment usually goes to the balance with the lowest rate.
What you pay above the minimum goes either to the highest-rate balance first or across your balances in proportion. Your card issuer decides, so check your card agreement.
When your rate can go up
Federally regulated card issuers must tell you before an interest rate increase takes effect. Missing your minimum payment can also raise your rate, for a while or for good.
How to pay less interest
- Pay your full statement balance by the due date whenever you can. Interest on purchases is then $0.
- Pay early if you carry a balance. A lower balance on more days means a lower average daily balance.
- Pay as much above the minimum as you can. In the example above, $100 more a month saves $562.
- Skip cash advances. Interest starts on day one, often at a higher rate, and a fee may apply.
- Compare interest with rewards. If you pay more in interest than you earn back, a lower-rate card saves you more.
Mr. Loonie’s tip Carrying a balance? Pay twice a month, once on payday and again before the due date. Your average daily balance drops, and so does your interest.