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Credit Card Interest: Monthly vs. Yearly

6 min read

credit card interest monthly vs yearly

Written By

Clay Shiffman

Credit cards are convenient and can help you manage your money, but knowing how the interest works is key to making smart financial decisions. Many people ask, “Is credit card interest monthly or yearly in Canada?” It’s a good question because understanding this can help you avoid piling up too much debt.

In this blog, we’re going to clear things up. We’ll explain how credit card interest works, including the Annual Percentage Rate (APR) and how often interest is added to your bill. Plus, we’ll walk you through how to figure out your interest rate, understand grace periods, and find ways to lower the interest you pay on your credit card. By the end, you’ll have a better understanding of credit card interest in Canada, helping you get the most out of your credit card without letting the costs get away from you.

What is credit card interest in Canada?

Credit cards are a popular way to buy things now and pay for them later. But, if you don’t pay your full bill each month, you’ll end up paying extra in the form of interest. In Canada, many people often wonder if this extra charge shows up on their bill every month or just once a year.

First, let’s break down what “interest” means. It’s like a fee the credit card company charges you for using their money. It’s how these companies make money. When you hear about the Annual Percentage Rate (APR), it’s talking about how much interest you’ll pay over a year.

But here’s what you really need to know: even though the APR is a yearly thing, the interest actually gets added to your bill every month. So, if there’s an amount you didn’t pay off by the end of the month, the company tacks on a bit more money as interest.

How does credit card interest and Annual Percentage Rate (APR) work?

Using a credit card means you’re borrowing money from the company that gave you the card, and you get a bill every month showing how much of their money you’ve spent. If you pay off everything you owe before the payment is due, you’re all set and don’t have to pay anything extra. But if you only pay some of it or none at all, you’ll have to pay interest.

Interest is basically a fee you get charged for not paying off your entire bill. It’s based on the APR. Think of APR as the total yearly cost of using your credit card if you don’t pay everything back right away. But it’s not just the interest. It might also include other fees from the credit card company spread over the year. It’s like the overall price for borrowing money with your card.

An example of APR

Imagine your credit card’s APR is 20%. You might think this means you’ll pay 20% more on what you borrow over a year, but credit card interest actually gets calculated more often than once a year.

The company takes that 20% and breaks it down into a daily rate. Then, they add a little bit of interest every day to what you owe. If you don’t pay off your whole credit card debt, these daily bits of interest start stacking up. By the end of the month, your bill shows all of these daily bits of interest added up, making your owed amount bigger over time, even without adding new charges.

This is why, if you don’t pay your bill in full, you might notice your credit card balance gets higher every month. It’s because of these daily bits of interest piling up.

What is a credit card grace period?

A credit card grace period is like a little break the credit card company gives you, where you don’t have to pay interest on the things you buy. This break usually lasts about 21 to 25 days, starting from the end of your billing cycle to the due date of your payment.

So, if you use your credit card to buy something and then pay back the full amount by the time it’s due, the credit card company won’t make you pay any extra interest. However, if you don’t use the grace period to pay the full amount you owe, you’ll start getting charged extra interest on the money you borrowed right from the day you made your purchase.

How is interest applied to your credit card?

Interest is applied to your credit card when you carry a balance beyond the grace period. The credit card interest is calculated based on your average daily balance, including any new purchases, cash advances, or balance transfers, and added to your outstanding balance.

Here’s a breakdown of how to calculate credit card interest:

Daily interest

The credit card company looks at your APR (the yearly interest rate) and breaks it down into a daily rate.

Since the APR is for the whole year, you need to find out how much it is per day. You do this by dividing your APR by 365 days in a year.

Example: If your APR is 20%, your daily rate would be 0.0547% or about 0.055%.

Average daily balance

Keep track of how much you owe on your credit card every day for one billing cycle (the time between your monthly bills). Add up all those daily amounts, then divide by the number of days in that cycle. This gives you your average daily balance.

Example: Say your total is $1,000, and your billing cycle has 30 days. That makes your average daily balance $33.

Calculating daily interest charges

Multiply your average daily balance by your daily interest rate. This will show you how much interest you’re adding on average each day for that billing cycle.

Example: If your average daily balance is $33, you multiply the daily rate of 0.055% by $33 to find out how much interest you get charged in just one day. This makes your daily interest amount about $1.80.

Adding it up

At the end of your billing cycle, the credit card company adds up all these little daily interest charges. That total is the interest you’ll see on your next credit card statement.

To find out your interest for the month, you multiply your daily interest by the number of days in your billing cycle.

Example: If your billing cycle is 30 days, you multiply your daily interest amount of $1.80 by 30. This means the interest your credit card will generate for that billing period is $54.

If your card has a grace period, and you pay the full balance by the due date, you can avoid these interest charges completely. However, if you don’t pay in full, you lose the grace period, and interest starts piling up right away.

What is a compounding interest rate?

Compounding interest is when your interest earns its own interest.

Let’s say you have $1,000 on your credit card, and you don’t pay anything onto it, so it earns $54 in interest that month. When the next month comes around, you don’t just earn interest on your original $1,000 but also on the $54 in interest that was added to last month’s bill. So, for month two, you’re now being charged daily interest on $1,054.

As time goes on, this process keeps repeating. Each month, you earn interest on a slightly larger amount of money (because it keeps including the interest earned during the month before).

How does credit card interest work on a cash advance?

When you make a cash advance by taking out cash using your credit card, the way interest is handled changes quite a bit from regular credit card purchases. As soon as you take out the cash, you start getting charged interest right away. Usually, if you buy something with your card and pay the whole bill on time, you don’t have to pay any extra interest. But with cash advances, you don’t get this break; the interest starts building up from the moment you withdraw the cash.

What’s more, the interest rate for cash advances tends to be higher compared to interest rates for purchases. This means that borrowing cash with your credit card is more expensive than using it to make purchases. On top of the higher interest rate, you’re also looking at extra fees just for the privilege of taking out a cash advance. This could be a set fee or a percentage of how much cash you withdraw, making the total cost of the cash advance even higher. This is why it’s best to leave cash advances as a last resort.

How does a missed payment affect my credit card interest?

When you miss a payment on your credit card, it can make your situation a bit tougher in a few ways.

First off, if you miss a payment, your credit card company might bump up your credit card’s interest rate to a higher penalty rate. This means you’ll end up paying more interest on what you owe than before. This penalty rate can be a lot higher than your usual rate, which makes it more costly every time you don’t pay off your full balance. This will be explained in your credit card agreement, including how much your interest rate may increase as a penalty.

Also, if you were enjoying an interest-free grace period where you didn’t have to pay interest on new things you bought, missing a payment could end that. You’d start getting charged interest on anything new you buy right away, making everything more expensive.

If you think you might miss a payment, reach out to your credit card company first. They might be able to work with you to find a solution, like changing your payment due date or helping you set up a payment plan.

How can I lower my credit card interest rates?

Lowering your credit card interest rates can make a big difference in how much you pay over time. Here are some simple steps to try:

Just ask

Sometimes, the easiest way to get a lower rate is to call your credit card issuer and ask tonegotiate a lower credit card interest rate. If you’ve been a good customer and paid your bills on time, they might say yes to keep you happy.

Consider a balance transfer

If you find a low-interest credit card, moving your high-interest balance to that card can save you money. However, be aware of any balance transfer fees.

Look for better offers

Check out low-interest credit cards that offer lower rates, especially those with no annual fees or introductory 0% APR offers for balance transfers. Just be sure to read the fine print and understand when the promotional rate ends.

Pay more than the minimum payment

If you only make the minimum payment, most of your money goes to cover the interest, not actually decreasing what you owe. By paying more, you knock down your total debt faster and end up paying less interest over time.

The bottom line

Understanding how your credit card charges interest, including the extra fees from taking out cash or what happens if you miss a payment, is important for smart money management. When you know how all this works, you can use your credit card better, avoid unnecessary charges, and keep your interest costs down.

Always aim to pay off the full amount you owe every month to avoid interest. If you can’t manage that, try to pay more than just the minimum required.

If you find yourself in a tight spot and can’t make a payment, get in touch with your credit card company. They may offer a solution to help you handle your payments more easily. With this info in hand, you’ll be more prepared to make wise choices with your credit card, stay away from extra fees, and maintain healthy finances.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!


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