Building your credit score is one of the most important financial steps to take as a newcomer to Canada. A good credit history can help you qualify for an apartment rental, personal loan or a credit card. Having a low-interest credit card can make borrowing more affordable.
Here’s everything you need to know about how interest works for low-interest credit card options.
Fixed vs. variable interest rates
Low-interest-rate credit cards offer an opportunity to pay a lower annual percentage rate (APR) than a standard credit card — for example, 12% versus 21%. Credit card providers typically set credit card rates one of two ways: fixed or variable.
Fixed interest rates
With a fixed-rate credit card, your interest rate stays the same every month. This can make it easier to budget, especially if you carry a balance from month to month.
A fixed rate can also provide peace of mind, knowing you won’t encounter any surprise rate hikes.
Variable interest rates
A variable interest rate is subject to monthly changes based on your bank’s prime rate. The prime rate is set by the Bank of Canada. Since the rate can change from month to month, this can make it more difficult to budget.
The advantage of variable interest rates is that they can sometimes be lower than fixed interest rates. However, if the prime rate rises, your interest rate will rise too.
Grace periods
All federally regulated financial institutions have to provide a minimum 21-day grace period to pay your bill without accruing additional interest.1 The grace period begins on the last day of your billing period.
For instance, say you use your credit card to purchase a laptop on January 15. On February 1st, you receive your credit card statement, which includes your laptop purchase. With a 21-day grace period, you have until February 21st to pay off your laptop if you want to avoid interest charges.
The grace period may not apply to certain transactions, however, such as cash advances.
Interest rates for different types of transactions
Credit card interest rates can also vary based on how you use your card.
Promotional APR on balance transfers
Some low-interest rate credit cards offer balance transfer options. A balance transfer involves moving debts from one or multiple credit cards to a new card with a lower interest rate.
Many balance transfer cards offer a low or 0% rate during the promotional period, which typically lasts 6 to 18 months. If you’re able to pay off all or most of your balance during the promotional period, you may be able to save money.
After the promotional period ends, your interest rate will increase to the standard rate. For example, a balance transfer credit card might offer a 0% rate for 12 months. Once the 12 months are up, your rate might increase to 21%.
It’s important to note that in some cases, the promotional rate may not apply to new purchases, so those charges would accrue interest at the higher standard rate.
Interest on cash advances
A cash advance is when you use your credit card to take out money from an automated teller machine (ATM) or bank. Credit card issuers typically charge a higher interest rate for cash advances than for regular purchases, and that interest starts accruing right away.
Pay on time to avoid penalties
A late credit card payment can result in several negative consequences, including late fees and a penalty interest rate, which increases your regular rate.
A late payment could also lower your credit score. Your payment history accounts for the largest portion of your credit score, and even just one missed payment can stay on your credit report for years.
If you’re worried about missing payments, consider setting up automatic payments to cover at least the minimum payment amount. You can also set monthly alarms on your phone to remind yourself to make sure you have enough money in your account when your payment is due.
A low-interest credit card may be right for you
With responsible use, a low-interest credit card can help new Canadians build credit, save money on interest and achieve financial goals. Be sure to research credit cards thoroughly, make sure you understand the terms and conditions and make a plan to stay on top of your debt.