Why This Matters:
Interest rates and fees are where many credit card users get trapped. Understanding how they work can help you avoid unnecessary costs and keep your finances in check.
What is Interest & How is It Charged?
Interest is the cost of borrowing money. If you don’t pay off your credit card balance in full each month, interest is applied to the remaining balance.
Key Factors That Determine Interest Costs:
- APR (Annual Percentage Rate): The yearly cost of borrowing. Most credit cards in Canada have an APR between 19.99% – 22.99%.
- Daily Compounding Interest: Interest is charged daily, making balances grow faster if left unpaid.
- Grace Period: If you pay your statement balance in full each month, you won’t be charged interest on new purchases.
Example Scenario:
Imagine you have a $1,000 balance with an APR of 20% and you don’t pay it off in full. Here’s how interest works:
📅 Day 1: You owe $1,000.
📅 Day 30: Interest is applied daily, adding around $16.67 to your balance.
📅 After 6 months: You now owe $1,106 without making any purchases!
Takeaway: Paying even a portion of your balance reduces interest accumulation.
Common Credit Card Fees & How to Avoid Them
Most credit cards charge fees for specific actions. Let’s break them down.
|
Fee Type |
What It Means |
Typical Cost |
How to Avoid It |
|
Annual Fee |
A yearly charge for card benefits. |
$0 – $699+ |
Choose a no-fee card if it makes sense for your spending. |
|
Late Payment Fee |
Charged if you miss a payment. |
$25 – $40 |
Set up automatic payments or calendar reminders. |
|
Foreign Transaction Fee |
Extra charge for purchases made in non-CAD currencies. |
~2.5% of purchase |
Use a no foreign transaction fee card when traveling. |
|
Cash Advance Fee |
A fee for withdrawing cash from your credit card. |
$5 – $10 + interest (immediate) |
Avoid cash advances unless absolutely necessary. |
|
Balance Transfer Fee |
A fee for transferring debt to another card. |
~3% of amount transferred |
Make sure the transfer saves you more in interest than the fee. |
|
Over-Limit Fee |
Charged if you spend more than your credit limit. |
~$29 – $39 |
Track your balance and keep spending within your limit. |
How Credit Card Fees Add Up Over Time
Small fees might not seem like a big deal, but they can quickly accumulate.
Example Scenario:
Emma has a credit card with:
- A $99 annual fee
- A $30 late payment fee
- A 2.5% foreign transaction fee
- A cash advance fee of $5 + immediate interest
She forgets to pay her bill on time once and travels abroad, spending $1,000 in USD. Here’s what happens:
- Annual fee: $99
- Late payment fee: $30
- Foreign transaction fee: $25 (2.5% of $1,000)
- Cash advance: $5 fee + extra interest
Total extra charges in one year = $159+ in fees!
Takeaway: Fees can quietly eat into your budget. Knowing how they work helps you avoid them.
Quick Recap: Key Takeaways
- Interest is charged daily on unpaid balances—always try to pay in full to avoid it.
- Grace periods allow you to avoid interest on purchases if you pay off your full statement balance.
- Annual fees, late fees, and cash advances can add up—choose the right card to minimize unnecessary charges.
- Using no-foreign-transaction-fee cards while traveling can save you money.