A Guide to Credit Card Rates of Interest in Canada

Jack Prenter, Founder of Dollarwise

The Annual Percentage Rate (APR) on your credit card impacts the total cost of borrowing, 

APR is the annual percentage interest that you will be charged on any balance carried. This interest is typically charged daily or weekly, not yearly, and so it will begin to compound and can result in a higher real cost than the actual APR number that you see.

For Canadians managing their finances with credit cards, understanding credit card interest rates is paramount. Knowing this figure enables individuals to make informed financial choices, helping them avoid unnecessary costs and minimize the possibility of accumulating debt due to misunderstood interest rates. 

How credit card rates of interest work

These rates are calculated on a daily basis, unlike other loans that might compound interest monthly or annually. 

This daily accrual means that your outstanding balance accrues interest each day based on the card’s daily rate, derived from the card’s APR. The daily rate is typically calculated by dividing the card’s APR by the number of days in a year.

Here’s a quick example to help you understand how it works:

  • You have $750 on your credit card on the first day.
  • Your card’s APR is 18%
  • The daily interest rate (APR / 365) is 0.049%. Based on these metrics, you would incur $0.37 in interest. For the second day, bringing your total to $750.37.

This would continue happening for a month, eventually bringing your tally to $761.1 (with interest). That means your monthly rate of interest would be 1.48% (a $11.1 increase).  

Compounding interest on credit cards is a key factor that influences the final amount owed. When you don’t pay off your full balance, the accrued interest gets added to the outstanding amount, and subsequent interest is calculated on this new total. 

This compounding effect results in a situation where interest is charged not just on the original borrowed sum but also on the previously accrued interest, amplifying the total amount owed over time. 

You should also know that there are a couple of different interest rate types – purchase, cash advance, balance transfer, promotional, and penalty.

Factors influencing credit card interest rates

Credit card interest rates can vary drastically from lender to lender, but which factors do the lenders use to determine interest rates? While the rates themselves can differ a lot, the primary determination process is virtually the same. 

One of the primary influencers is an individual’s creditworthiness and credit history. Lenders assess an applicant’s credit score and financial history to determine their risk level. 

Those with higher credit scores, indicating a history of responsible borrowing and timely payments, often qualify for lower interest rates, and vice versa. 

Moreover, credit card interest rates vary significantly based on the card type and the policies set by different issuers. Rewards cards, for instance, may have higher interest rates compared to basic or standard credit cards. 

Here are 10 credit cards that Scotiabank offers and their interest rates:

Credit CardPurchase Interest RateCash Advance Rate
Scotiabank Platinum American Express Card9.99%9.99%
Scotiabank Gold American Express Card20.99%22.99%
Scotiabank American Express Card19.99%22.99%
Scotia Momentum Visa Infinite Card20.99%22.99%
Scotia Momentum Visa Card19.99%22.99%
Scotia Momentum No-Fee Visa Card19.99%22.99%
Scotiabank Value Visa Card12.99%12.99%
ScotiaGold Passport Visa Card19.99%22.99%
Scotiabank Passport Visa Infinite Card20.99%22.99%
Scotiabank Scene+ Visa Card20.99%22.99%

Source: Scotiabank

Additionally, the issuer’s policies, such as promotional offers or specific card features, can influence the interest rates applied to a card.

Knowing how interest rates are calculated enables cardholders to compare options effectively and choose cards that align with their financial habits and needs while minimizing interest expenses.

Types of credit card interest rates

  1. Purchase Interest Rate: This rate applies to regular purchases made using the credit card when the full outstanding balance is not paid by the due date. It’s the most common type of interest rate associated with credit cards.
  2. Cash Advance Interest Rate: When a cardholder withdraws cash using their credit card, they incur a cash advance interest rate, which is typically higher than the purchase rate. This rate is charged from the moment the cash is withdrawn until it’s fully repaid.
  3. Balance Transfer Interest Rate: Some credit cards offer promotional rates for transferring balances from one card to another. These rates can be lower than regular purchase rates but often have specific terms and timeframes during which the lower rate applies.
  4. Promotional Interest Rate: Credit card issuers sometimes offer promotional rates, which can be significantly lower or even 0% for a certain introductory period. These rates usually apply to specific transactions or within a specified timeframe.
  5. Penalty Interest Rate: When cardholders fail to make at least the minimum payment by the due date or breach other terms in the agreement, penalty interest rates that are considerably higher than standard rates may apply.

And here are a couple of useful examples to make these easier to understand:

  1. Purchase Rate Example: Consider a credit card with a purchase rate of 19.99% per annum. If a user carries a balance of $1,000 without paying it off in full, they’ll be charged approximately $16.66 in interest per month.
  2. Cash Advance Rate Example: With a cash advance rate of 24.99%, withdrawing $500 would result in higher interest accrual than regular purchases, often starting from the withdrawal date.
  3. Balance Transfer Rate Example: If a card offers a promotional rate of 0% for the first 12 months on balance transfers, transferring a $3,000 balance from another card could help save on interest during the promotional period.
  4. Penalty Rate Example: Missing the minimum payment deadline on a card with a penalty rate of, for instance, 29.99%, could significantly increase the interest owed.

Strategies to manage and reduce credit card interest

If you find yourself in a situation where your card’s interest rate has become fairly high (or was high from the get-go), there are a couple of methods that can help lower it. You might have to adapt your usual spending habits to utilize these strategies to their maximum extent so be prepared to make some changes if required. 

Paying in full to avoid interest

Paying the full outstanding balance by the due date is the most effective strategy to avoid credit card interest altogether. When the entire statement balance is settled each month, no interest accrues on purchases, allowing cardholders to use credit cards without additional costs.

Making multiple payments to lower average daily balance

Generally speaking, interest is calculated daily on the current balance  Making even small payments sooner will reduce the total interest you will pay on the balance.

For example, paying $5 per day rather than $150 at the end of the month will meaningfully reduce the interest you’re charged.

Making small daily payments can also help you stick to your budget and make it easier to pay down your credit.

Using low-interest credit cards for ongoing balances

Choosing a low-interest credit card, with a lower ongoing interest rate compared to standard cards, can be preferable for individuals who expect to carry a balance over time. 

These cards offer a reduced interest rate on purchases, cash advances, or balance transfers. While they might not have the allure of rewards or perks, they can be an excellent choice for those seeking to manage and minimize interest costs on their credit card balances.

Comparative analysis of credit card rates of interest

Comparing costs of different interest rates

Let’s consider two credit cards, both with a $5,000 balance:

  • Card A: Offers an interest rate of 18.99%.
  • Card B: Provides a slightly lower rate of 15.99%.

If the cardholder makes only minimum payments, here’s how the interest costs accumulate over time:

  • Card A (18.99%): With minimum payments, it might take approximately 25 years to clear the debt, incurring approximately $11,727 in interest.
  • Card B (15.99%): The same balance with the lower rate would take around 20 years to pay off, with approximately $7,708 in interest.

This is the most basic example that only uses interest rates to compare the costs. Other factors may contribute to your overall credit card choice, such as which interest rate types are used, what promotions or rewards the cards offer, etc. 

Impact of small differences in rates over time

Even seemingly minor changes in interest rates can have a significant impact on the total cost of credit card debt.

In the example above, the 3% difference in rates between Card A and Card B translates into a substantial difference in both the time taken to clear the debt and the amount paid in interest (5 years and roughly $4,000 less for using the 3% lower interest rate card).

On top of that, these figures emphasize how paying even a slightly higher interest rate can substantially prolong the time needed to become debt-free and increase the overall interest paid.

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