Get A Professional Assessment Of Your Debt Situation
Your job is to educate yourself. If you are carrying a large amount of debt, speak to a professional.
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 dont? 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.
They will also be able to analyze the type of debt you carry and educate you on the right choice for you. You can sometimes reduce your debt with restructuring. For others, bankruptcy might be the right choice.
Heres a list of our offices in your city.
And finally, here are real stories about debt from Canadians who survived their financial crisis.
What Is Credit Card Interest And Why Does It Matter
You can think of APR as the cost of borrowing money. The credit card issuer covers the cost of your purchases upfront, while you get to pay them back over time. In exchange, they charge you a fee for this service in the form of interest.
Credit card interest is generally described in terms of APR, which stands for annual percentage rate. However, credit card interest is actually calculated on a daily basis and then charged monthly at the end of a billing cycle.
To understand how much a purchase made with your credit card will really cost, you need to understand how interest is calculated and when it is applied. That way, youll know exactly how much interest youll pay on your credit cards.
For example, if you wanted to pay off a $2,000 purchase over 24 months, you might end up paying closer to $2,400 when you factor in interest charges. This may be worth it to you, or maybe you can be more aggressive with your payments and save, say, $150 in the long run.
Whats The Average Credit Card Interest Rate
You may be surprised to find that APRs on credit cards can inch all the way up to 26.13%.2 Thats more than a fourth of your balance! Depending on how much you carry on your account, that could add up to . . . well, a lot. Even just $100 left unpaid each month could result in an extra $25 you owe by the end of the yearand lets be real, people carry way more than just a Benjamin Franklin on their credit card statements.
As of 2019, the average APR on credit card accounts is around 16.88%, which is almost 4% more than it was five years ago.3 And thats after the Federal Reserve slashed interest rates for the first time in over a decade!4
Of course, different lenders handle interest rates many different ways. And depending on the kind of card, your interest rate may be higher or lower than the average APR nationwide. But with the average American household knee-deep in $7,136 of credit card debt, you better believe APRs will continue to rise.567
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How To Pay Off Multiple Credit Cards With Different Aprs
If you carry over balances every month or have hit your credit limit on more than one credit card, youll want to develop a strategy for paying off the cards and improving your credit.
Two popular strategies are known as snowball and avalanche.
To use the snowball strategy, begin by identifying the credit card with the smallest balance. Then follow these steps:
- Pay the minimum amount due on your other credit card accounts.
- Put anything extra toward repaying the smallest account.
- Once the smallest account is paid in full, move to the next smallest account.
- Use whatever extra you were paying on the first account toward the next one.
- Continue working from smallest to largest until your biggest credit card debt is paid off.
The avalanche strategy takes a different approach by focusing on the credit card accounts with the highest APRs, which cost you more on a per dollar basis.
To use the avalanche strategy, start by identifying which of your credit cards has this highest APR. Then, follow similar steps as the snowball strategy:
- Pay the minimum amount due on your other credit card accounts.
- Put anything extra toward repaying the account with the highest APR.
- Once the highest APR account is paid in full, move on to the account with the next highest APR.
- Use whatever extra you were paying on the first account toward the next one.
- Continue working from highest APR to lowest until all your credit card debt is paid off.
How Does My Credit Card Company Calculate The Amount Of Interest I Owe
Many credit card companies calculate the interest you owe daily, based on your average daily account balance.
Often card companies charge one interest rate for purchases and different interest rates if you use your credit card to get cash, to write a check using your credit card account, or for other transactions. If your card has a grace period, you can avoid paying interest on purchases if you pay off your balance in full by the due date each month.
How does the daily interest calculation work?
Many issuers calculate the interest you owe daily, based on the average daily balance. The interest charged daily is called the daily periodic rate. Since interest is accruing daily, not monthly, this means that if you dont have a grace period, the sooner you pay off all or some of your balance, the less interest you will pay.
How do I know what APR applies to different types of balances?
Your statement must show each category with a different APR and the amount of the balance that falls in each category. If your card has a grace period , the grace period usually applies only to the category of new purchases and only if you were not already carrying a balance.
How do my payments affect the amount of interest I owe?
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How Much Interest Will You Pay
The amount of interest you pay is calculated based on your annual interest rate, balance, and how much you pay each month. Fortunately, this Credit Card Interest Calculator makes the math easy. Simply input the variables, click the Calculate Credit Card Interest button, and you’ll learn not only the total amount of interest you’ll pay, but also:
- The amount of your next payment that will be applied to principal
- The amount of your next payment that will be applied to interest
- The number of monthly payments until your balance reaches zero
- The number of years until your balance reaches zero
In addition, you can lower the overall amount of interest you’ll pay by negotiating a lower interest rate or increasing your payments. The more creative you get, the less you’ll pay!
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How To Stop Paying Interest
Interest is charged to your account on the last day of your statement period.
The easiest way to avoid paying interest is to always pay your statements closing balance on time, and not make any cash advances.
If you’ve been paying interest on purchases, you can regain your interest-free period by:
- Paying your account balance in full to get interest-free on all purchases from that day.1 This is everything you owe up until today, including any purchases youve made since your last statement.2
- Paying your closing balance in full by the due date shown on your statement to get interest-free on new purchases in your next statement period. This is the amount you owe from your last statement period.
Remember, you dont need to wait until the due date to pay off your credit card. The sooner you pay off everything you owe, the less interest youll need to pay. When you pay your account balance in full, its important to remember that there may still be interest owing. Your next statement will include any interest accrued from the start of your statement period up until the time we receive the payment.
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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 and 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 runplus 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 Ill respond.
Forewarned is forearmed!
Why Should I Know My Daily And Monthly Apr
Your credit card balance can fluctuate on a daily, weekly and monthly basis. By calculating your daily and monthly APR, you can better understand how much of your money is going to interest. Understanding how much of your money is going to interest rather than your balance may also motivate you to pay off your debt or help you decide what purchases are worth putting on the credit card. By breaking down your interest rates on a daily and monthly basis, you can learn more about the interest you are accruing over time and use this information to make some of your financial decisions.
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How Are Credit Card Interest Rates Calculated
Credit card interest rate is calculated as the Annual Percentage Rate of charge. It is the interest rate for the whole year rather than a monthly rate. However, while calculating interest rate for monthly dues, the monthly percentage rate will be applied to the transactions. The APR and MPR vary from one bank to another and one card to another. While applying for a credit card, its important to know how much APR is being charged on a particular card.
Other Credit Card Interest Rate Facts To Keep In Mind:
- Separate interest rates and charges can apply to cardholders cash advance balance and balance transfer balances. Furthermore, many credit cards will impose a higher penalty interest rate when cardholders fail to make payments.
- Most credit card variable interest rates can change with the Prime Rate. The Prime Rate is an interest rate that is three percentage points above the federal funds rate, which is set by the Federal Reserve Bank. Because this interest rate can increase, cardholders should be careful not to incur more interest charges than they can comfortably pay each month.
Remembering these simple facts about credit card interest will empower you to make the best financial decisions for yourself and your family. Use Discovers to estimate the interest and payoff time for any credit card.
Originally published February 27, 2015.
Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
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Variable Fixed And Promotional Rates
Officially, there are 3 types of interest rates for credit cards variable, fixed and promotional. Realistically, however, there is only one. They are all variable to one degree or another.
Some credit cards may start out with fixed and promotional rates, but inevitably those rates change, effectively becoming variable.
Nonetheless, you may choose to start with either or fixed or promotional rate because it suits your goals. Here is a review of the pros and cons for all three:
Understanding Credit Card Interest Rates
Offers for new credit card accounts are everywhere, from letters you get at home, emails that hit your inbox, and promotions you see on social media. Nearly all these offers promote an attractive annual percentage rate APR to convince you its a terrific deal you just cant pass up.
Not so fast.
Before you sign up for a credit card, be sure you carefully review the fine print, especially if you have poor credit and are working to improve your credit score. The credit card agreements terms will become part of a legal agreement between you and the creditor. Youll want to know those details, including:
- What annual percentage rate is being offered and if it expires after a promotional period.
- How the lender calculates the interest.
- Any fees youll owe due to balance transfers, late and/or missed payments, or other violations of the credit card agreement.
The first step is understanding the APR and how it works.
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How To Avoid Interest Charges On Credit Card
As we mentioned above, the best way to avoid paying credit card interest is to avoid carrying a balance altogether, but again, we get this isn’t always possible.
If you can’t pay off your balance in full, do be sure to try and pay it down as much as you can, and if that’s still not feasible, consider transferring your balance to a balance transfer credit card with a 0% intro APR period to give yourself some more time.
The CitiÂ® Double Cash Card – 18 month BT offer, for example, offers 0% intro APR on balance transfers for 18 months. Eighteen months is a solid period of time to pay down a balance while saving yourself some money on interest charges. Just be aware though that once the intro period expires, standard 13.99% â 23.99% APR applies, so it’s important to pay off your balance in full within the intro time frame to avoid paying any interest once it expires. Citi is a CardRatings advertiser.
This card also earns up to 2% cash back â unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases. To earn cash back, just pay at least the minimum due on time.
Keep in mind though that these new purchases will accrue interest if you’re not paying them off in full each month, so if your primary purpose is to avoid paying interest fees, and you can’t pay off your balance in full each month, it might be best to just use this card for its intro 0% balance transfer APR offer until you can get your finances under control.
Will I Have To Pay Annual Percentage Rate Charges
If you are carrying a credit card balance, you will be charged APR interest at a rate that is calculated and determined by your credit card issuer. The three main types of APR are fixed rate, variable rate, and promotional rate. With fixed rates, your APR is likely to stay the same throughout the time you carry your card unless otherwise stated. Variable rates may increase or decrease depending on federal rates. Promotional rates include zero-interest or low-interest periods offered as introductory incentives by credit card companies.
You’ll know which rates are associated with your credit card by checking your card member agreement and monthly credit card statements.
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How To Avoid Credit Card Interest
The best way to avoid credit card interest altogether is by paying your balance in full before your credit card payment due date. If you can avoid carrying a balance, your APR is meaningless, Ulzheimer says.
This requires good credit habits like paying on time, regularly monitoring your account, and making sure youre not overspending. If youre worried about making charges you cant afford to pay off, you can strategize your card use by swiping only for planned purchases, and only when you have the cash to pay your bill in full.
There are also some credit cards that offer 0% interest, at least for a limited time. Some have 0% introductory interest offers on new purchases, which you can use to finance a large, planned purchase youll pay down over time. Others offer 0% interest on balance transfers, which is a great way to eliminate existing debt balances. The length and terms of these offers can vary, and many 0% interest credit cards even offer rewards on your spending.
Tools To Help You Visualize Your Credit Card Interest
Now that you understand how credit card interest works, you may want to use an automated tool to help facilitate your calculations. Our credit card interest calculator allows you to add as many credit card balances as you’d like below, along with their interest rates and the type of monthly payments you make. The calculator will show what your total interest payments will be by the time you completely finish paying off your debt.
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