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Published June 28, 2021
Updated July 15, 2021

How Do Credit Cards Work in Canada?

Credit cards let you borrow money up to a limit. You make monthly payments and interest is charged on unpaid debts. Use your credit card wisely and you could build credit and earn rewards.

Credit cards are a part of many people’s daily lives. You can use them to make purchases and they can help you build credit and improve your credit score. While there’s no denying the convenience factor of credit cards, if you don’t use them responsibly, you could end up in debt. Understanding how credit cards work and what options are available to you will help you take control of your finances.

How credit cards work

Credit cards are pieces of plastic or metal issued by financial institutions to approved consumers looking for a line of credit. Your credit card is assigned a credit limit, which is the maximum amount of money you can use to pay for goods or services. You’re essentially borrowing funds that will need to be paid back at a later date.

When your bill arrives, you can choose to pay the full balance, the minimum payment, or an amount in between. If you can pay off the entire balance, it’s a good idea to do so. That means you won’t owe anything else because of the interest-free grace period of at least 21 days on your purchases. However, if you decide to make the minimum payment or even a partial payment, you’ll incur interest charges. These extra fees can add up quickly and will increase the overall cost of your purchases.

Credit card providers will also report your credit history to one of the two credit bureaus: Equifax and TransUnion. If you make your payments on time, you can improve or maintain your credit score. Missing payments or maxing out your credit cards — spending all the way up to your credit limit — can negatively affect your credit score. Having a lower credit score might affect your ability to access additional credit, such as a car loan or mortgage, in the future.

» MORE: What’s a good credit score?

Types of credit cards

Although all credit cards work in similar ways, different types of cards offer various benefits and rewards. What kind of credit card you should pick depends on your needs, your credit, and other factors.

Rewards credit cards

If you have a good credit score, rewards credit cards may be appealing as you’ll get something back for every purchase you make. However, make sure the rewards you earn outweigh any costs you pay for the card, like an annual fee. Generally speaking, there are four kinds of rewards cards to consider:

  • Cash back cards: These cards give you a fixed percentage of cash back when you make purchases. Pay close attention to the payout details, as you could receive rewards monthly, yearly, or when you’ve earned a minimum amount of cash back.
  • Airline or hotel cards: Airline and hotel credit cards are good for people who like to travel and are loyal to certain brands. The points you earn can be used for free flights or nights at hotels.
  • General travel cards: Instead of being loyal to one specific brand, you can get a general travel rewards card. Although these rewards points are more flexible, they may not be as valuable in terms of redemption value as those from airline or hotel cards.
  • Store credit cards: Many stores have their own credit cards that allow you to earn points from the retailer’s rewards program. These cards can be appealing, but the benefits have a limited scope. Make sure it is a good fit for your shopping habits before applying.

Low-interest credit cards

As the name implies, low-interest credit cards have low interest rates, often in the range of 9% to 13%. Their rates can be significantly lower than the typical credit card interest rate of 20%, which can be an advantage if you carry a balance on your credit card. Some low-interest credit cards offer a balance transfer option with a promotional rate. This type of promotion allows you to move your debt from an existing credit card to your new one at a lower interest rate for a fixed period.

» MORE: How is credit card interest calculated?

Credit cards for no/bad credit

If you don’t have a credit history or you’ve made mistakes that have lowered your credit score, you may not qualify for a traditional credit card. That doesn’t mean you won’t have access to credit cards; you’ll just be limited to the following choices:

  • Secured cards: To qualify for this type of card, you’ll deposit security funds. The amount you deposit usually determines your credit limit. As you make purchases and pay off your balance, your history will be reported to one of the credit bureaus, and eventually, you may qualify for an unsecured credit card.
  • Prepaid cards: A great option for people who want to limit their spending, prepaid cards only give you access to funds that you’ve already put on the card. Only a few prepaid credit cards report to the credit bureaus, though, so choose wisely if you hope to build your credit.

» MORE: How to get a credit card when you have bad credit

How much credit cards cost

Every credit card comes with some kind of cost or fee, but they’re not always obvious. Here’s what to look out for:

  • Annual fees: Many credit cards charge a yearly fee. Cards with better rewards usually have higher fees, but they also usually come with better benefits. Some credit card fees are charged monthly instead of annually.
  • Interest charges: Every credit card has an interest rate for purchases and cash advances, and the rates for these two types of transactions may differ. Make sure you know these rates before you apply for a card.
  • Balance transfer fees: Some credit cards that offer balance transfers charge fees. In most cases, these fees are around 1% to 3%.
  • Foreign transaction fee: Many credit cards in Canada charge a foreign transaction fee of 2.5% on any purchase that’s not made in Canadian dollars.

Reasons to get a credit card

Technically speaking, you don’t need to have a credit card, but there are a few compelling reasons to get one:

  • Credit building: Credit cards will help you build your credit score, which is vital if you ever need a loan in the future.
  • Sign-up bonuses: Many cards offer a generous bonus when you’re approved, such as increased cash back or additional points.
  • Additional benefits: Depending on the card, you might get other benefits such as travel insurance, extended warranty coverage, lounge access, and more.
  • Flexibility: Credit cards can help you manage your monthly budget or even save you from a financial emergency — as long as you use them responsibly.

A credit card is just one of the tools you’ll use on your money journey. If you always pay off your balance in full, you can reap the benefits without paying extra costs. However, if you overspend or fall behind on your monthly payments, you could quickly find yourself in a debt trap. Be smart about your money and use your credit cards responsibly.

» MORE: How to apply for a credit card

About the Author

Barry Choi
Barry Choi

Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.

DIVE EVEN DEEPER

What Are the Different Types of Credit Cards?

Different types of credit cards come with different requirements, perks, benefits, and fees. Common types include no-fee, rewards, and low-interest cards.

How Is Credit Card Interest Calculated?

The amount of interest you pay depends on your card’s interest rate and your balance. You can avoid interest entirely by paying your bill in full each month.

How to Apply for a Credit Card

Before applying, decide what type of credit card you want. Then, consider your credit score, income, and the implications of your application.

What is a Good Credit Score in Canada?

Credit scores in Canada range from 300 to 900. The higher the better. Generally: 660-724 is good; 725-759 is very good; 760-900 is excellent.