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You may think you understand how credit card debt works, but do you really? If your credit card has an interest rate of 19.5%, how much interest will you accumulate at the end of each month? When does the credit card company start charging you interest? How can you avoid paying interest altogether? If you think you know the answers, read below to find out how right (or wrong) you are!

When is interest paid?

Many credit card holders don’t know this, but if you pay for a purchase within 21 days of the transaction date (known as the grace period) you won’t have to pay any interest at all! If you’ve got a high interest rate you’re probably singing “hallelujah!” If you need to make a purchase before payday it’s good to know that you have a few weeks before you have to worry about paying it off. This can be especially helpful when unexpected or emergency expenses come up, like a vehicle repair, needing to replace a burned out dishwasher, or having to book a flight for a funeral. Life happens. But it’s a comfort to know that interest doesn’t have to.

You will, however, have to pay interest in three separate scenarios:

  • when you carry a balance longer than the grace period
  • when you make a cash advance (withdrawing cash from your credit limit)
  • when you make a balance transfer (moving debt from one credit card to another)

Annual percentage rate

When you went shopping for a credit card you probably looked for two things in particular: what kind of perks the card had to offer, and what the interest rate was. The annual percentage rate (APR) is also known as the card’s interest rate. This is the number the credit card company will use to calculate how much interest you owe them after each payment cycle. This is how much you will be charged on balances carried over. The credit card company takes your APR and divides it by 365 days of the year to find out how much interest to charge you each day you carry a balance. (More later on how this is calculated.)

Minimum payments

As credit card holders we are all aware of minimum payments. It’s the bare minimum a credit card company will allow you to pay for each pay period. This amount is calculated at 3% of your balance. Should you default on this minimum the credit card company will be sure to let you know how they feel about it. The first thing they usually do is hike your interest rate significantly after 2 consecutive missed  payments. After that they may put a freeze on your account, or close it altogether and send it to collections.

However, there is little virtue in continuously making only the minimum payment month after month. On your statement you may also notice a “minimum payment timeline.” This is how long it will take you to pay off the balance on your credit card should you ONLY make minimum payments. Depending on your balance this timeline may be months, years, or even decades!

Note: If you are not receiving a credit card statement in the mail each month then you are likely receiving an electronic statement. If you aren’t receiving an electronic notification then we recommend signing in to your bank account online and looking for your statements there. Or check in to your local branch and ask for details. It’s also a good idea to review your statements each month for notifications, updates, and changes to the terms of your credit card. For example, your interest rate can jump significantly, especially if you’ve missed two or more payments in a row.

Digging your way out

The average Canadian has credit card debt to the amount of $4,154, according to the credit agency TransUnion. How long would it take average Joe to pay this off? If we pour his credit card information into a debt repayment calculator, like this one provided by the government of Canada, we can see that making minimum payments would take 19 years and 9 months to pay off. The image of Andy Dufresne chiseling his way out of Shawshank with a tiny rock hammer comes to mind.

Not only will it take nearly 2 decades to pay off this kind of debt by making minimum payments, but by the time you’re done you’ll also have paid $4,927.59 in interest. That’s more than the initial balance! This information alone should be enough to convince you that minimum payments are not the way to go. Credit card debt can truly become a life-sentence (if you let it.) Take a look at your own credit card statement to get an idea of what your sentence might look like if you don’t take more aggressive action.


If you don’t plan on paying off your balance before the end of the grace period, it’s a good idea to know what to expect when you get your monthly statement. Knowing how the credit card company is going to calculate your interest charges will help you be able to estimate what your balance will be.

The credit card company calculates your interest charges in 4 steps. For this example, lets say your payment cycle starts on the first of the month and that you have an interest rate of 19.99%. Pretend you make a purchase of $500 on March 1st, another purchase of $100 on the 3rd, and no other transactions for the rest of the month. How much interest will you owe on your next statement?

  1. Calculate the average daily balance. This is done by adding up each daily balance of the billing period and dividing it by the number of days in that billing period.
    • (day 1 balance + day 2 balance + day 3 balance etc.) ÷ number of days in the billing period = average daily balance
    • Ex. (500 + 500 + 600 etc.) ÷ 31 = $593.55
    • Ex. OR ((500 × 2) + (600 × 29)) ÷ 31 = $593.55
  2. Calculate the average daily interest rate. The company finds this rate by dividing the card’s APR by the number of days in the year.
    • APR ÷ 365 = average daily interest rate
    • Ex. 19.99% ÷ 365 = 0.0547%
  3. Calculate the periodic interest rate. This is done by multiplying the average daily interest rate by the number of days in the billing period.
    • average daily interest rate × days in billing period = periodic interest rate
    • Ex. 0.0547% × 31 = 1.6957%
  4. Calculate the monthly interest payment. This amount is determined by multiplying the average daily balance by the periodic interest rate.
    1. average daily balance × periodic interest rate = monthly interest payment
    2. Ex. $593.55 × 1.6957% = $10.06

Based on these calculations you will owe $10.06 in interest for the month of March.

Other types of interest

There are two other types of credit card interest you should be aware of: cash advances and balance transfers. These kinds of transactions do not have a grace period, even if you pay the money back on the same day you made the transaction. And they have a much higher rate of interest than typical “carried forward” charges. Please refer to your credit card agreement or your most recent statement to find out how much you will pay on these kinds of transactions. If you can’t find the information there, you can call your credit card company’s customer service department. The phone number is most often listed on the back of your credit card.

Taking action

Knowing you can make minimum payments can be a huge relief when you take an unexpected financial turn in the road. But it’s obvious that this isn’t a road you want to be on for very long. Getting back on course with larger more reasonable payments will help you to pay off your debt much more quickly, and help you avoid paying more interest. And your best course of action is to pay for transactions within the grace period. If you do anticipate having to hold on to debt for a longer period of time, we suggest looking into a line of credit because their interest rates are much lower than credit cards.

For more information on these topics or other mortgage inquiries, please contact us today!