How to pay off credit card debt: understanding how credit card interest really works

#Managing your money

Not all credit cards are evil. Here’s how to use yours carefully to avoid interest fees.

You’ve seen the images on credit card advertisements: beautiful beaches, relaxing hammocks and happy, carefree people living their best life. Credit card companies offer lucrative rewards systems with points and cash back options in hopes that you use your credit card for those rewards.


But racking up those points can take years and could contribute to debt building up on your credit card. Just the thought of credit card debt and how it can affect your life is enough to ruin the perfect day on that tropical beach. How can you take back control of your credit card debt? Let’s look at some strategies.

Buy now, pay later, pay interest, repeat

The average Canadian’s credit card debt is a sobering fact. According to a 2019 TransUnion report,  the average credit card balance in Canada is $4,236 per card. Don’t forget, some people have several credit cards.

However, a bigger problem for Canadians is their credit card’s interest charges which range from 9% to 29%. With a balance of $4,236, you could be paying between $400 and $1,200 in interest annually to your credit card company.

How to avoid the spiral of interest charges

If you use a credit card, your goal should always be to pay it off in full each month. Most credit cards offer an interest-free period called a grace period. If you pay off your credit card in full within this time frame, you won’t be charged interest. But, if you don’t pay off the full balance by the due date, the grace period is removed. You’ll then be charged interest on the unpaid amount from the statement date, as well as on the remaining balance that you’ll carry over into the next month.


Say you charge $1,000 to a credit card during the month of August. With a 20% interest rate your Sept. 1 credit card statement shows that you owe $1,000, with a $20 minimum payment due on Sept. 30. If you make only the minimum payment of $20, you’ll carry over a $980 balance into the month of October. On Oct. 1, you’ll start being charged interest on the $980 from Oct.1-30, which would be $16.11. Your Oct. 30 bill would include $16.11 in interest charges from Oct. 1-30 on your $980 balance, as well as interest on that interest, which would be an additional $3.

This means $1,000 in purchases has so far cost you $19.11, and of the $20 you’ve paid, only 89 cents has actually gone towards the original $1,000 purchase. This scenario also assumes you shredded the credit card on Oct. 1 and haven’t charged any additional purchases to that card during the month of October.

The bigger question to ask yourself is whether the instant satisfaction of the August purchases is still going to be worth it when you’re paying for them in November and beyond.

What’s the good news?

Now that you know how credit card interest works, you’re on the right path to understanding how to manage credit card debt. Paying the full credit card balance each month is the best way to keep money in your account. There are so many other uses for your hard-earned cash than paying interest fees.

Credit cards aren’t evil

Should you shred all your credit cards? Not necessarily. But fewer is better. Multiple credit cards can negatively affect your credit rating, even if you don’t carry a balance. If you have a habit of spending sprees or making impulse purchases, it’s better to remove the temptation by owning fewer cards.

There are advantages to having a credit card if you’re able to pay it off every month. A credit card comes in handy when you have an unexpected expense like an emergency car or home repair. The key is remembering that credit card purchases should only be made if you are able to pay off the balance in full, every month. Paying off your credit card in full each month can have a positive effect on your credit rating.

If you’re struggling with how to manage your credit card debt or are thinking about combining multiple cards, it’s important to have a strategy that will benefit you in the long run. Your financial security advisor can help you develop a plan to avoid future interest charges and free up money to incorporate into a financial security plan that will help you achieve your short and long-term goals.

If you use a credit card, your goal should always be to pay it off in full each month.
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This information is general in nature and is intended for informational purposes only.  For specific situations you should consult the appropriate legal, accounting or tax advisor

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.


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