How interest actually accrues
Interest is the price of carrying a balance forward instead of paying it off today. Every credit product states an annual rate — the APR — but that annual figure is broken down and applied far more often than once a year. On revolving credit, most Canadian issuers apply interest daily, which means the balance you carry compounds continuously rather than in a single yearly step.
This is why two balances with the same APR but different compounding frequency can cost meaningfully different amounts over time, and why understanding the mechanics — not just the headline rate — matters when comparing accounts or evaluating a consolidation offer.
Simple vs. compound, and the daily rate
Simple interest is calculated only on the original principal for the life of the loan. Many installment products — some personal loans and auto loans — use simple interest, which means the cost is more predictable and does not grow on interest already charged.
Compound interest, used on nearly all Canadian credit cards and many lines of credit, calculates interest on the principal plus any interest already accrued. The card issuer converts the APR to a daily periodic rate — the APR divided by 365 — and applies that rate to your balance every single day, then adds the result to the balance the following day.
APR ÷ 365
Formula for the daily periodic rate
19.99%–29.99%
Typical Canadian credit card APR range
Daily
Frequency most card issuers compound interest
A concrete example
A $5,000 balance at 22.99% APR carries a daily periodic rate of roughly 0.063%. Applied daily and left untouched by payments beyond the minimum, that balance can take well over a decade to clear and cost more in interest than the original amount borrowed.
Why principal reduction is the real fix
Because interest is calculated against the outstanding balance, every dollar applied to principal — rather than to interest already charged — reduces the base the next day's interest is calculated against. This is the entire logic behind accelerated payments: a $100 extra payment today is worth more than the same $100 paid a year from now, because it stops compounding sooner.
It is also why refinancing or consolidating at a lower rate only helps if the freed-up payment room is redirected toward principal rather than absorbed into other spending. A lower rate with an unchanged payment amount still reduces the balance faster, but the effect is smaller than pairing the lower rate with the same total payment you were making before.
The minimum payment trap
Minimum payments on Canadian credit cards are typically calculated as a small percentage of the balance, often 2% to 3%, with a stated dollar floor. That formula is designed to keep the account in good standing, not to pay it off in a reasonable timeframe. Because the payment shrinks as the balance shrinks, paying only the minimum can stretch repayment past a decade on a moderate balance while the total interest paid can exceed the original principal.
Canadian credit card statements are required to disclose an estimated payoff timeline at the minimum payment. That disclosure is worth reading closely — it is often the clearest signal that a minimum-only strategy needs to change.
Long-term recovery after default
If an account has already gone to default or collection, recovery follows a predictable arc. First, confirm the balance and status directly with the current holder of the debt — this may be the original creditor or an agency it has assigned the account to. Second, establish a written arrangement that fits your verified budget capacity rather than what feels urgent to promise. Third, rebuild your credit file methodically once the arrangement is honoured: on-time payments on any remaining open accounts, modest utilization, and patience, since the impact of a default softens over time as new positive history accumulates.
For guidance specific to an account FDR Asset Group holds, see Dealing with a Debt Collector or contact our team directly.