{"id":188,"date":"2021-06-28T17:42:16","date_gmt":"2021-06-29T00:42:16","guid":{"rendered":"https:\/\/www.nerdwallet.com\/ca\/?page_id=188"},"modified":"2024-04-16T02:38:13","modified_gmt":"2024-04-16T09:38:13","slug":"how-do-credit-cards-work-in-canada","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/ca\/credit-cards\/how-do-credit-cards-work-in-canada","title":{"rendered":"How Do Credit Cards Work in Canada?"},"content":{"rendered":"\n

Credit cards are part of daily life for many Canadians. You can use them to make purchases, and they can help you build credit and earn rewards.<\/p>\n\n\n\n

Credit cards are a convenient financial tool but can land you in debt if used irresponsibly. <\/p>\n\n\n\n

Understanding how credit cards work and what options are available to you will help you take control of your finances. <\/p>\n\n\n\n

How credit cards work<\/h2>\n\n\n\n

A credit card<\/a> is a piece of plastic or metal issued by financial institutions to approved consumers looking for a line of credit. <\/p>\n\n\n\n

Your credit card is assigned a credit limit<\/a>, which is the maximum amount of money you can use to pay for goods or services. You\u2019re essentially borrowing funds that must be repaid  at a later date.<\/p>\n\n\n\n

The exact rules governing how a particular credit card works, including limits, interest rates and fees, are found in its terms and conditions<\/a> document.<\/p>\n\n\n\n

Credit card providers will also report your credit history<\/a> to one of the two credit bureaus: Equifax and TransUnion. If you make your payments on time, using a credit card can improve or maintain your credit score. Missing payments or maxing out your credit cards \u2014 spending all the way up to your credit limit \u2014 can negatively affect your credit score. A lower credit score might affect your ability to access other types of credit, such as a car loan or mortgage, in the future.<\/p>\n\n\n\n

How credit card payments work<\/h3>\n\n\n\n

Credit card statements<\/a> are issued at the end of each billing cycle, which typically lasts a month. Statements include a list of monthly transactions and how much money must be repaid: the balance owing. <\/p>\n\n\n\n

When your bill arrives, you can pay the full balance, the minimum payment<\/a>, or an amount in between. If you opt for the minimum payment or even a partial payment, you\u2019ll incur interest charges. These extra fees can add up quickly and will increase the overall cost of your purchases.<\/p>\n\n\n\n

How credit card interest works<\/h3>\n\n\n\n

Each time you use your credit card, you must pay back the borrowed amount plus interest. This interest is also called the annual percentage rate, or APR. The average rate for a Canadian credit card is 19.4%, according to NerdWallet analysis.<\/p>\n\n\n\n

Some credit card companies offer an interest-free grace period for purchases. These grace periods typically last 21 days. Grace periods begin on the last day of your monthly billing cycle. You won\u2019t owe any interest if you pay your balance in full before the next billing due date.<\/p>\n\n\n\n

Credit card payment example<\/h4>\n\n\n\n

Say you use your credit card to book a $500 flight. It\u2019s the only thing you charge to your card that month, and you don\u2019t have an outstanding balance. Before your next billing period begins, you make a $50 payment to your credit card. You start your next billing period with a $450 balance, which now begins to accumulate interest at a rate of 19% APR. <\/p>\n\n\n\n

If no additional payment is made within the next 30 days, the $450 balance will generate $7.08 of interest over the statement period.<\/p>\n\n\n\n

\u00bb MORE:<\/strong> How is credit card interest calculated?<\/a><\/p>\n\n\n

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Best Credit Cards in Canada<\/h4>\n\t\t\t\t\t\t\t\t\t

\n\t\t\t\t\t\tCompare all different credit cards side-by-side and find out the best card that will meet your need with special perks and benefits\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t

Explore Now<\/a><\/div>\t\t\t<\/div>\n\n\t\t\t\t\t\t\t
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\n\t\t\t\t\t\t\"Ad\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n

4 credit card fees to watch out for<\/h2>\n\n\n\n

Every credit card charges fees<\/a>, but they\u2019re not always easy to spot. Here\u2019s what to look out for:<\/p>\n\n\n\n

1. Annual fees<\/h3>\n\n\n\n

Many credit cards charge a yearly fee. Cards with better rewards typically have higher fees. Some credit card fees are charged monthly instead of annually.<\/p>\n\n\n\n

2. Interest charges<\/h3>\n\n\n\n

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<\/a> before you apply for a card.<\/p>\n\n\n\n

3. Balance transfer fees<\/h3>\n\n\n\n

Some credit cards that offer balance transfers charge fees. In most cases, these fees are around 1% to 3%.<\/p>\n\n\n\n

4. Foreign transaction fee<\/h3>\n\n\n\n

Many credit cards in Canada charge a foreign transaction fee<\/a> of 2.5% on any purchase that\u2019s not made in Canadian dollars. However, you may be able to avoid paying foreign exchange or transaction fees if you get an international credit card<\/a>.<\/p>\n\n\n\n

Credit card versus debit card<\/h2>\n\n\n\n

A debit card<\/a> lets you make purchases with the funds available in your chequing account. You don\u2019t pay interest on your purchases and your credit history isn\u2019t impacted by what you spend.<\/p>\n\n\n\n

A credit card lets you borrow money from a financial institution up to a certain limit. Whatever you borrow must be repaid with interest. The way you use your credit card can impact your credit score because your card issuer reports your payment history to the credit bureaus.<\/p>\n\n\n\n

\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t
<\/th>Credit card<\/th>Debit card<\/th>\n<\/tr>\n<\/thead>\n
Spending limit<\/td>Borrowing limit set by the card provider.<\/td>Spending is limited to funds available in a chequing account.<\/td>\n<\/tr>\n
Contributes to credit history<\/td>Typically.<\/td>No.<\/td>\n<\/tr>\n
Annual fee<\/td>Sometimes.<\/td>Debit cards typically come free with a chequing account, though there may be annual fees associated with the chequing account.<\/td>\n<\/tr>\n
Interest charges<\/td>Accrues interest on overdue balances.<\/td>None.<\/td>\n<\/tr>\n
Insurance coverage<\/td>Common.<\/td>None.<\/td>\n<\/tr>\n
Earns rewards<\/td>Common.<\/td>Less common.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div><\/div>\n\n\n\n

How credit cards build credit<\/h2>\n\n\n\n

Credit card providers report cardholder activity to Canada\u2019s two major credit bureaus: Equifax and TransUnion. Credit card activity affects your credit score, but isn\u2019t the only factor. <\/p>\n\n\n\n

Lots of financial activity contributes to your credit score, including your debt repayment history, how much available credit you use, the age of your credit accounts and other financial events, like credit inquiries, bankruptcy and accounts sent to collections agencies. <\/p>\n\n\n\n

Note that an overpaid credit card<\/a>, one that has a negative balance does not have a negative impact on your credit score.<\/p>\n\n\n\n

Types of credit cards<\/h2>\n\n\n\n

Although all credit cards work in similar ways, different credit cards<\/a> offer different benefits and rewards. What kind of credit card you should pick depends on your needs, your credit, and other factors.<\/p>\n\n\n\n

Rewards credit cards<\/h3>\n\n\n\n

If you have a good credit score (generally 660 and above), rewards credit cards<\/a> may be appealing as you\u2019ll 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.<\/p>\n\n\n\n

Cash back cards<\/strong><\/h4>\n\n\n\n

Cash back credit cards<\/a> pay you back a fixed percentage of what you spend. Pay close attention to the payout details, as you could receive rewards monthly, yearly, or when you\u2019ve earned a minimum amount of cash back.<\/p>\n\n\n\n

Airline or hotel cards<\/strong><\/h4>\n\n\n\n

Airline and hotel credit cards are suitable for people who like to travel and participate in specific loyalty programs<\/a>. The points you earn may be used for free flights or nights at hotels.<\/p>\n\n\n\n

General travel cards<\/strong><\/h4>\n\n\n\n

Instead of being loyal to one specific brand, you can get a general travel credit card<\/a>. Travel rewards programs tend to have more flexible redemption options but may not offer as much value as airline or hotel rewards.<\/p>\n\n\n\n

Store credit cards<\/strong><\/h4>\n\n\n\n

Many stores have their own credit cards that allow you to earn points from the retailer\u2019s 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. <\/p>\n\n\n\n

Most credit card purchases are assigned merchant category codes (MCCs)<\/a> that can impact the points or cash back you earn. So it doesn’t hurt to check your statements to review the rewards earned on your monthly purchases and how your card categorizes spending.<\/p>\n\n\n\n

Low-interest credit cards<\/h3>\n\n\n\n

As the name implies, low-interest credit cards<\/a> 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<\/a> 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.<\/p>\n\n\n\n

Credit cards for no\/bad credit<\/h3>\n\n\n\n

If you don\u2019t have a credit history or you\u2019ve made mistakes that have lowered your credit score, you may not qualify for a traditional credit card. If that\u2019s the case, you may want to consider a secured or prepaid card.<\/p>\n\n\n\n

Secured cards<\/strong><\/h4>\n\n\n\n

To qualify for a secured credit card<\/a>, you\u2019ll 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.<\/p>\n\n\n\n

Prepaid cards<\/strong><\/h4>\n\n\n\n

Prepaid cards are a practical option for those who want to limit their spending or who may not qualify for a credit card. These cards only offer access to funds added to the card\u2019s account \u2014 similar to a debit card.  Only a few prepaid credit cards<\/a> report to the credit bureaus, though, so choose wisely if you hope to build your credit.<\/p>\n\n\n\n

How to compare credit cards<\/h2>\n\n\n\n

The right credit card for you will depend on your spending habits and lifestyle. When selecting a card, consider the following:<\/p>\n\n\n\n