The average Canadian carries at least two credit cards in their wallet. People use credit cards for many different reasons. Some use them to collect rewards on their purchases, and some to build their credit rating. Others use credit cards because they don’t have the money to cover their purchases. If they don't pay off those purchases in full each month, they'll have to pay purchase interest charges.
Regardless of why you use a credit card, it’s essential to understand the risks and challenges of making purchases with your credit card. One of those risks is purchase interest charges, which can add up in a hurry.
The purchase interest charge varies depending on your credit card provider, balance, and annual percentage rate or APR (also called purchase interest rate). This article will cover everything you need to know about purchase interest charges in Canada.
- What is a purchase interest charge?
- The dangers of purchase interest charges
- How to avoid purchase interest charges
- If you can't pay off your balance in full each month
- The best low-interest credit cards in Canada
- How to pay less purchase interest charges in Canada
What is a purchase interest charge?
A purchase interest charge is the amount of interest you have to pay on the purchases you make with your credit card. If you don’t pay it off by the end of your billing cycle, you need to pay interest on the balance owing.
Average daily balance
Credit card purchase interest is calculated using the average daily balance method. This is based on your credit card’s purchase interest rate (or APR). Generally, credit cards will have an average APR between 11% and 25%. Calculating this amount can be a bit confusing, so let’s walk through it step-by-step. To calculate the purchase interest charge, your credit card company will take each day’s total balance and add them all together. Then, they will divide that total by 30, which will give an average daily balance amount.
Annual percentage rate (APR)
Your credit card company will then calculate purchase interest on the average daily balance. Every credit card has an annual percentage rate or APR. The APR may also be listed as the purchase interest rate for most Canadian credit cards. The APR is the percentage of interest charged over an entire year, but most credit cards charge you monthly.
How to calculate monthly interest
You can calculate the monthly interest by dividing the APR by 365. This will give you your daily interest charge. Multiply that number by 30, and you’ll get the monthly rate. Multiply the monthly rate by your average daily balance to get the monthly purchase interest charge.
The process can seem overwhelming, so let’s look at a simple example:
- You spend $1000 on the first day of the month
- You spend another $1000 on the 16th day of the month
For the first 15 days of the month, your balance will be $1000. And for the last 15 days of the month, your balance will be $2000. To calculate the average daily balance, we multiply $1000 x 15 and add it to $2000 x 15. That equals a total of $45,000. Divide that by 30 days, which equals an average daily balance of $1500.
- $1000 x 15 = $15,000
- $2000 x 15 = $30,000
- $30,000 + $15,000 = $45,000
- $45,000 ÷ 30 = $1,500
For this example, your credit card’s APR is 20%. We divide 20% by 365, which gives us a daily purchase interest of 0.055%. Multiply by 30 days in a month, and you get 1.65%. That is how much purchase interest you’ll be charged on your average daily balance. In this case, it’s $1500, which results in a total of $24.75 interest for the month.
- 20% ÷ 365 = 0.055%
- 0.055% x 30 = 1.65%
- 1.65% x $1,500 = $24.75
The dangers of purchase interest charges
While in the above example you may only be paying $25 interest on your balance, this amount quickly increases if you don’t pay your balance in full each month. You might be making payments towards your credit card balance each month, but every time you carry over a balance, you’ll incur purchase interest charges.
Often your minimum monthly payment will barely cover the interest and not even make a dent in the balance owning. That’s why it’s essential to use your credit card strategically. You can do so by only making purchases that you can pay off in full by the end of your billing cycle.
To give you an example of what this could look like, let’s imagine you max out your credit card at $3000, and you have a purchase interest rate, known as APR, of 20%. Even if you make no more purchases on the card and pay the minimum payment every month, it would still take you almost 18 years to pay off.
You would end up paying $3491 in interest, totalling $6491 paid on $3000 worth of purchases. Or, if you paid a flat payment of $90 per month, it would take four years to pay off, and you’d only pay $1415 interest.
How to avoid purchase interest charges
Luckily, as long as you use your credit card responsibly, you won’t need to pay purchase interest charges. Purchase interest is only charged at the end of your billing cycle. You won’t need to pay any purchase interest charges if you pay off your credit card balance in full by the due date.
You will pay purchase interest on the remaining balance you carry over to the following month. Keep in mind that your billing statement may not fall on the 1st and last day of the month. So, check your statement for the due date, so you don’t miss it.
If you can't pay off your balance in full each month
If you’re unable to pay off the entire balance, we recommend making smaller payments frequently throughout the month to lower your average daily balance.
Additionally, many credit card companies offer promotional periods with 0% interest as an introductory rate. They do this to encourage people to apply for their credit cards. These offers will give you a longer time to pay your balance without incurring interest. Make sure to keep an eye on the length of this period. Once it ends, you’ll have to start paying purchase interest charges.
Your best bet is to look for a low-interest credit card. This way you can avoid purchase interest charges if you cannot pay your balance at the end.
The best low-interest credit cards in Canada
If you’re trying to pay less purchase interest charges, then you need to choose a credit card that has a low-interest rate. Purchase interest rates can vary substantially between one credit card to the next. We’ve rounded up the best low-interest credit cards in Canada, so you have a good place to start.
- Annual fee: $29 (exempt the first year)
- Interest rate on purchase: 12.99%
- Interest rate on cash advances: 12.99%
Offer valid until October 31, 2023.
Eligibility will also vary depending on your credit score and annual income. Of course, the best option will always be to pay your balance in full, so you don’t have to pay any interest at all.
- National Bank® Syncro™ Mastercard has a purchase interest rate of 8.90% minimum.
- HSBC +Rewards™ Mastercard® has a purchase interest rate of 11.90%.
- BMO Preferred Rate Mastercard® has a purchase interest rate of 12.99%.
- Scotiabank Value® Visa has a purchase interest rate of 12.99%.
- MBNA True Line® Mastercard® has a purchase interest rate of 12.99%.
When looking at different credit card options, you can use a credit card payment calculator to plug in the purchase interest rate of various cards. You can also play around with potential credit card balances to determine how much interest you’d pay if you didn’t clear the full balance. This can be a helpful way to determine your interest based on realistic estimations of how much you can pay back each month.
How to pay less purchase interest charges in Canada
Making purchases using a credit card can be beneficial when done responsibly. Credit cards offer many perks like rewards points, cash back and discounts with partners. But if you aren’t paying off your monthly balance, you can end up paying thousands of dollars in purchase interest charges.
Always use your credit card strategically, and only buy what you can afford to pay back by the due date. That way, you can avoid purchase interest charges and reap all the benefits of using a credit card.
Still not a fan of credit cards? Here's How to Live Without a Credit Card in Canada.
Interest charges are fees that are added to your monthly credit card statement when you don’t pay off your balance in full each month. These interest charges are a percentage of your average daily balance, and the rate is set by your credit card company. The higher your credit card balance, the more interest you’ll pay, so avoid letting a balance roll over to the next month.
The only way to stop purchase interest charges is to pay off the entire balance of your credit card by your statement due date. Even if you pay a portion of the balance or meet your minimum monthly payment amount, you will still receive interest charges.
Avoid purchase interest charges by always paying off the entirety of your credit card balance by the due date each month. Some credit cards may offer a grace period, where you have a set number of days to pay the balance before they charge purchase interest. Credit card companies may also offer an introductory interest-free period when opening an account. That said, this is only temporary. If you know you will be unable to pay off the entire balance you can reduce the amount of interest you incur by paying off as much as you can throughout the month to bring down your average daily balance.