How credit cards work: grace periods, interest and minimum payments
A credit card is free if you pay the full statement balance by the due date, and expensive if you don't. The mechanics, in order.
A credit card lets you borrow from the issuer every time you tap. Whether that borrowing costs you anything depends on one habit: paying the full statement balance by the due date.
The billing cycle and the grace period
Purchases build up during a billing period, usually about a month. When it closes, the issuer produces a statement showing your balance, a minimum payment and a due date. The time between the end of the billing period and the due date is the interest-free grace period.
For federally regulated issuers, which include the banks, the Bank Act sets two rules. The due date can be no earlier than 21 days after the end of the billing cycle. And no interest can be charged on purchases from that cycle if you pay the outstanding balance in full by the due date. The FCAC's example: buy a phone on January 15, receive the January statement on February 1, and you have until February 21 to pay without interest.
What happens if you don't pay in full
Pay anything less than the full balance and the grace period no longer protects you. The FCAC explains that you then pay interest from the date you made each purchase, and you keep paying interest until the balance is paid in full. Card agreements typically calculate it on your average daily balance and charge it monthly.
The grace period never applies to cash advances, cash-like transactions or balance transfers. Interest on those starts the day the transaction happens, often at a higher rate. The FCAC's example is 19% on purchases and 22% on cash advances, and many cards also charge a flat fee per cash advance.
The minimum payment, in numbers
The FCAC describes two common formulas: a flat amount, usually $10, plus interest and fees; or the higher of a dollar amount (typically $10) or a percentage of the balance (typically 3%). Since August 1, 2025, the minimum payment for Quebec residents is 5%.
Here is why the minimum is a trap. Suppose you carry a $2,000 balance at 20.99%:
| Item | Amount |
|---|---|
| Approximate interest for the month ($2,000 × 20.99% ÷ 12) | $34.98 |
| Minimum payment at 3% | $60.00 |
| Portion of the payment that actually reduces the balance | $25.02 |
More than half the payment goes to interest. As the balance falls, the minimum falls with it, which stretches repayment over years. Federally regulated issuers must show on each statement how long it would take to pay off the balance with minimum payments only. Read that line once; it is usually persuasive.
Late payments cost more than a fee
If you miss the minimum payment, your interest rate may increase, temporarily or permanently, and you may lose a promotional rate. The FCAC's sample disclosure shows a card whose rate rises from 19.99% to 28.99% after a late payment. A missed payment can also be reported to the credit bureaus; see Credit scores in Canada.
Fees to read in the information box
Federally regulated issuers must give you an information box summarizing the key terms with the application. Look for:
- Annual fee, and whether a first-year waiver applies (see sign-up bonus fine print).
- Foreign currency conversion, commonly 2.5% on top of the exchange rate.
- Cash advance and balance transfer fees.
- Over-limit fees and the penalty rate after missed payments.
How payments are applied
When a balance has parts at different rates, the minimum payment typically goes to the lowest-rate portion first. The FCAC explains that anything you pay above the minimum goes either to the highest-rate portion or proportionally across the whole balance, depending on the issuer. That is one more reason cash advances are best avoided on a card that already carries a balance.
- Set an automatic payment for the full statement balance.
- Never use the card for cash advances.
- If you carry a balance, pay a fixed amount well above the minimum.
- Read the information box before you apply, not after.
Noted.
Sources
Figures in this note were checked against these sources on the date shown above.
This note is general education, not personal financial, tax or legal advice. Rules and figures change; confirm with the source and, where needed, a qualified professional. Terms are defined in the glossary.
