Credit cards: Understanding your rights and your responsibilities

Understanding your credit card payment terms

Interest-free grace period

You can benefit from an interest-free period, also known as the grace period, when you make purchases with your credit card. To do so, you must pay the balance in full by the current month’s due date. The grace period on new purchases officially starts on the last date that is included in your monthly billing period.

The grace period on new purchases must be a minimum of 21 days as long as you pay the full balance by the current month’s deadline. The 21-day grace period on new purchases applies even if an outstanding balance has been carried forward from the previous month.

The interest-free period does not apply to balance transfers or cash advances. With these transactions, interest is charged right away.

 

Example:

Rajiv made a new purchase on May 5. His statement covers transactions he made between May 1 and May 31.
 
His statement shows the due date for his payment as June 21. This means that he will have a 21-day grace period from the last date included in the statement (May 31), provided that he pays the balance in full by June 21.

 

Avoiding interest charges

You will never have to pay any interest if:

1. you always pay the full amount owing on your credit card by the payment due date;

AND

2. you don’t use your credit card to take cash advances or make cash-like transactions, such as a wire transfer or money order.

How interest charges are calculated

If you don’t pay the amount owing on your credit card in full by the due date, you will pay interest, which increases the cost of everything you have charged to your card.

Transaction type
How interest is calculated
New purchases
(purchases that appear on your monthly statement for the first time)
You are not charged interest on the first monthly statement.
Previous purchases
(purchases that were listed on a previous statement where the full amount owing was not paid by the due date)
You are charged interest back to the date you made these purchases until you make a payment that covers the full amount of these purchases.
Cash advances, balance transfers and “cash-like” transactions You are charged interest from the date you made the cash advance or balance transfer until the date you repay the total amount in full.

You don’t benefit from an interest-free period on these transactions.

Minimum monthly payments

The minimum monthly payment is the minimum amount you have to pay for a given month if you are carrying a balance on your credit card.

If you don’t pay the minimum amount by the due date, your credit score could be lowered. The lower score could reduce your chances of getting a loan in the future.

Your credit agreement will tell you how your minimum payment is calculated. A common method is either a flat dollar amount (usually $10) or a percentage of your outstanding balance, whichever is greater.

Keep in mind that paying only the minimum amount you owe is very costly because interest will continue to grow.

 

Example:

Amy has an outstanding balance of $2,000.00 on a credit card with an 18% interest rate. Her minimum payment is $10.00 or 2% of the balance, whichever is greater. Amy’s minimum payment would initially be $40.00 (2% of $2,000).

  • If Amy makes only the minimum monthly payment of $40.00 every month, it would take her 30 years and 10 months to pay off her balance in full AND she would end up paying $4,931.11 in interest.
  • If Amy were to increase her monthly payment to $100.00, she would take only two years to pay off the balance in full and she would pay $395.65 in interest.
This example illustrates how expensive it can be to pay only the monthly minimum amount. Increasing the monthly payment by even a small amount can drastically shorten the length of time it will take you to pay off a credit card balance.

 

How payments are applied to your balance

If you do not pay off your balance in full, it’s important to understand how your credit card issuer will apply your payment against your balance. Federally regulated financial institutions, such as banks, must follow certain rules when applying your payment to your account.

Keep in mind that the credit card issuer can charge different interest rates for different types of transactions. For example, for purchases, your interest rate could be 18%, but for cash advances and balance transfers, it might be 21%. Check your credit card agreement or disclosure statement, because these interest rates must be outlined in the agreement or statement. If they are not, contact FCAC to review your agreement.

Credit card issuers can apply the minimum payment any way they want. However, if you pay more than the minimum amount, your credit card issuer has to apply the amount over the minimum payment in one of two ways:

  1. to the part of your balance with the highest interest rate, and then in descending order to the rest of your balance (next highest interest rate to lowest), or
  2. proportionally to all interest rate categories of the balance.

Try FCAC’s Credit Card Payment Calculator to see how increasing your payment will help you be debt-free sooner.

 

Example:
Let’s say you are carrying a $2,000 balance that includes $1,500.00 of purchases and $500.00 of cash advances. If you make a payment of $700.00 in addition to the minimum payment, your payment could be applied as follows:
Method one: Highest interest rate to the lowest
Type of transaction
Interest rate
Portion of balance
Amount applied to each transaction type
Cash advances
21%
$500.00
$500.00
Purchases
18%
$1,500.00
$200.00
Using method one, your $700.00 payment (over the minimum payment required) would pay off all of the cash advances, which have a higher interest rate. The remaining portion of the payment ($200.00) would be applied to the portion of the balance with the lower interest rate (purchases).
Method two: Payment applied proportionally
Type of transaction
Interest rate
Portion of balance
Amount applied to each transaction type
Cash advances
21%
$500.00
(25%)
$175.00
(25% of payment)
Purchases
18%
$1,500.00
(75%)
$525.00
(75% of payment)
Using method two, 25% of your payment ($175.00) would be applied to the cash advances, because cash advances account for only 25% of the balance. The other 75% of your payment ($525.00) would go toward the purchases, because they account for 75% of the balance. This means that you will continue to pay interest on $325 of cash advances at the higher interest rate.
 
  

What happens if you make a late payment?

It’s important to pay your credit card bill on time. If you don’t pay by the due date indicated on your statement, you’ll be charged interest on the entire amount you owe until you pay it in full.

Late payments could also result in:

  • penalties, such as an increase in your interest rate
  • damage to your credit score
  • your card being cancelled by your issuer.

If you want to cancel your card

To cancel a credit card account, you must contact your credit card issuer. Simply cutting the card or not using the card will not automatically cancel the credit card account.

See the FAQ How do I cancel a credit card account? for more information.

 

1|2|3|4|5 ]