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How do credit cards work? A beginner’s guide (2021)

Learn the basics of credit cards — and how to choose your first one.

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If you’ve been wondering, “How do credit cards work, anyway?” here’s a guide to get you up to speed. Once you get the hang of them, you’ll find that credit cards are incredibly helpful financial tools.

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American Express Cobalt Card

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What is a credit card?

A credit card is a small plastic card that lets you borrow money from a financial provider. If you borrow funds for a significant period of time, you’ll pay a fee for the privilege of borrowing — this is called interest.

Using credit cards are a secure and convenient way to pay both online and in person. They’re also excellent tools to build your credit score — a 3-digit number that represents how reliably you’re expected to pay your debt.

Beware: A credit card isn’t free money. You’re always expected to pay back whatever you borrow. There will also be a maximum limit to how much you can borrow at a time.

    How do credit cards work?

    Here’s how they work from getting one in the first place to paying your balance and maintaining your credit score.

    • Apply for a credit card.
      There are many different types of credit cards. Choose one based on which benefits you want, as well as your credit score and annual income. A credit card may have an annual fee — a fee you have to pay once a year to remain a cardholder. The most powerful cards with the highest spending limits and perks often have this fee, but you’ll find many great cards without it. You may see an introductory annual fee offered for the 1st year. This means you’ll pay a discounted fee for the first year and the normal annual fee every year thereafter.
    • Wait for approval.
      Major credit card providers often use automated decisions on card applications. You may see the results of your application immediately. If the provider needs to review your application further, you could wait 7 to 10 business days. Upon approval, look for your card in the mail within 7 to 10 business days. Then follow the enclosed instructions to activate your card. Congratulations — you’re ready to start using your first credit card!
    • Make purchases with your card.
      You can spend with your card by swiping it through a card reader. If your card has a chip, you’ll insert it into a card reader. You can also pay by tapping your card on terminals that are equipped with contactless payment technology. To spend online, enter your card number and additional information such as the expiration date, billing address and card verification code (CVC). As you spend, you’ll add to your card’s balance — the amount you’ve borrowed on your card but have not yet paid back. Your card provider will have set a maximum balance you’re allowed to have at any given time, which is called your credit limit.

      Pro tip

      If you try to make a purchase that puts you over your credit limit, the transaction will usually be declined.

      You can ask your card provider to allow charges over your credit limit. However, you’ll typically be penalized with a fee each time you exceed the limit.

    • Wait for your credit card bill, issued at the end of your billing cycle.
      Using your credit card means you’ll be repaying your credit issuer later for your purchases. But when do you have to pay? First, know when your billing cycle — the time between credit card billings — starts and ends. It can be from the 1st to the 30th of the month, but it could also start from the 10th of one month to the 10th of the next month, and so on. A billing cycle is usually between 25 and 31 days, but it can be longer or shorter depending on the card and provider. If you don’t know when your billing cycle is, ask your provider or check your card statement.
    • Decide how much to pay.
      When you receive your bill — called your credit card statement — it’s time to decide what to pay. After each billing cycle, your card provider will typically give you a grace period to pay off your purchases where you won’t be charged interest. If you pay your entire balance within this period — i.e., by the specified due date — you won’t be charged any interest. To avoid paying unnecessary interest, it’s a good idea to pay your entire balance. But you can also choose to pay the minimum amount possible or some amount in between. The amount you pay will affect how much interest you owe. You don’t have to wait for your bill to arrive before repaying your bank. If you’d like, you can pay off your balance immediately.
    • Wait for updates to your credit report.
      As you make payments on your card, your provider will report your payment history to the credit bureaus. Shortly after your payment due date, the bureaus will update your reported balances and you may see a change in your credit score.

    Not sure which type of credit card is right for you? Take our quiz.

    How are credit cards different from other cards?

    With a credit card, you are borrowing money that you’ll pay back later. Here’s how it differs from other types of payment cards:

    • Debit card.
      The primary function of a debit card isn’t to borrow money. Instead, you use a debit card to spend money you already have in a chequing or savings account. It may be branded as either a Visa debit or Mastercard debit card which allows you to make debit purchases online without entering your PIN number.
    • Charge card.
      With a charge card you are still borrowing money when you use it, just like a credit card, but you must pay your balance in full each month. You cannot make just a minimum payment. This is different than a credit card, which lets you carry a balance from month to month.

    Types of credit cards

    There’s a universe of credit cards out there, and it can be fun searching for your ideal pick. Here are the different card types you’ll find on the market.

    Different types of credit cards

    Standard credit cards

    • Low interest. This type of card can offer a low interest rate forever or a very low interest rate at the beginning that reverts to a higher rate later.
    • Balance transfer. With a balance transfer, you move your credit card debt to another card. A balance transfer card gives you a low or no interest rate for a period of time when you move your debt.

    Rewards credit cards

    Rewards cards provide bonuses for your everyday spending.

    • Cash back. You’ll get a percentage of your spending back usually at the end of the year using a cashback credit card. For example, if you spend $10,000 and get 1% cash back, you’ll receive $100.
    • Travel. You’ll accrue points or miles you can redeem for travel perks using a travel credit card.
    • Gas. Get discounts when you spend on fuel with a gas credit card.
    • Retail. You can accumulate points with these cards and redeem them for retails purchases and gift cards. Learn more about rewards cards here.

    Credit repair cards

    A credit repair card can help you re-build your credit history or build it from scratch if you don’t have any. It is relatively easy to get. It won’t offer top-notch rewards, but it does let you build or rebuild your credit slowly.

    • Secured. You’ll need to put down a security deposit to open a secured card. That deposit becomes your line of credit which you borrow against.
    • Prepaid. Before you can use a prepaid card, you pre-load it with funds. You can reload it with funds at any time.

    Specialty credit cards

    • Business. With a business credit card, you’ll typically get points, miles or cash back on business-related expenses plus travel benefits and perks.
    • Student. A great choice if you’re a post-secondary student, student credit cards are designed for students with little or no credit history.
    • Store. You can use store branded cards only at select retail locations or websites, but you’ll get discounts and rewards when you do. These cards promote loyalty to a specific store.

    Charge cards

    Compare credit cards by type

    Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Benefits with this card Description
    American Express Cobalt Card
    19.99%
    21.99%
    $120
    N/A
    Earn 5 Membership Rewards points per $1 spent at eligible grocery stores, restaurants, bars, cafés and food delivery services, and earn 2 Membership Rewards points per $1 spent at eligible gas stations, and on transit and travel purchases, and earn 1 Membership Rewards point per $1 spent elsewhere. Terms apply
    Earn up to 45,000 bonus Membership Rewards points. In your first year as a new Cobalt Cardmember, earn 2,500 Membership Rewards points for each monthly billing period in which you spend $500 on your card (for a total of 30,000 points in a year). Plus, earn a Welcome Bonus of 15,000 Membership Rewards points when you spend a total of $3,000 in purchases on your Card in your first 3 months of Cardmembership. Apply by May 5, 2021.
    BMO World Elite Mastercard
    19.99%
    22.99%
    $0 annual fee for the first year ($150 thereafter)
    $80,000
    Get 3 BMO Rewards points per $1 spent on eligible travel, dining and entertainment purchases (up to $50,000 spend annually), and get 2 BMO Rewards points per $1 spent on all other eligible purchases (and once you reach the $50,000 annual spend).
    Get up to $575 in value in your first year. Get a bonus of 40,000 BMO Rewards points ($285 travel value booked on bmorewards.com). Plus, get the $150 annual fee waived in the first year.
    American Express Aeroplan Card
    30% annual interest rate applies to balances not paid in full each month
    N/A
    $120
    N/A
    Earn 2x the points on eligible purchases made directly with Air Canada and Air Canada vacations, 1.5x the points on eligible dining and food delivery purchases and 1x the points on everything else.
    Earn up to 15,000 Welcome Bonus Aeroplan points and a bonus Buddy Pass as a new cardmember.
    SimplyCash Preferred Card from American Express
    19.99%
    21.99%
    $99
    N/A
    Earn 2% cash back on all eligible purchases
    Earn 10% cash back on all eligible purchases (up to $400 in cash back) for the first four months of Cardmembership.
    Choice Card from American Express
    19.99%
    23.99%
    $0
    N/A
    Earn 1 American Express Membership Point for every $1 you spend on purchases.
    Earn a Welcome Bonus of 10,000 Membership Rewards points when you charge $1,000 in purchases to your card in the first 3 months of Cardmembership.
    BMO Preferred Rate Mastercard
    12.99%
    12.99%
    $20
    $15,000
    Take advantage of an introductory balance transfer offer, annual fee waiver in the first year, and low purchase and cash advance interest rates.
    Get a rate of 3.99% on balance transfers for 9 months with a 1% transfer fee. Plus, get the $20 annual fee waived in the first year.
    BMO eclipse Visa Infinite
    20.99%
    23.99%
    $0 annual fee for the first year ($120 thereafter)
    $60,000
    Earn 5x the BMO Points for every $1 spent on groceries, dining in and out, gas and transit.
    Get up to 40,000 points and the $120 annual fee waived in the first year. Earn 25,000 points after you spend $3,000 in the first 3 months and get 15,000 points on your first anniversary.
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    Name Product Purchase Interest Rate Balance Transfer Rate Balance Transfer Fee Annual Fee Minimum Income Reward Description
    BMO Preferred Rate Mastercard
    12.99%
    3.99% for the first 9 months (then 12.99%)
    1%
    $20
    $15,000
    Take advantage of an introductory balance transfer offer, annual fee waiver in the first year, and low purchase and cash advance interest rates.
    Get a rate of 3.99% on balance transfers for 9 months with a 1% transfer fee. Plus, get the $20 annual fee waived in the first year.
    Tangerine Money-Back Credit Card
    1.95% intro APR for the first 6 months, 19.95% thereafter
    1.95% for the first 6 months (then 19.95%)
    3%
    $0
    $12,000
    Earn 2% cash back in two categories of your choice (or three categories if you open a Tangerine Savings Account and directly deposit your cash back into the account), and 0.5% cash back on everything else.
    Get a 1.95% interest rate on balance transfers for the first six months (valid within the first 30 days of account opening).
    BMO Rewards Mastercard
    19.99%
    1.99% for the first 9 months (then 22.99%)
    1%
    $0
    $15,000
    Get 1 BMO Reward point for every $1 spent on eligible purchases, and get 2 BMO Rewards points for every $1 spent at participating National Car Rental and Alamo Rent A Car locations.
    Get a bonus of 15,000 BMO Rewards points. Plus, get a rate of 1.99% on balance transfers for 9 months. A 1% fee applies to transferred balances.
    BMO AIR MILES Mastercard
    19.99%
    1.99% for the first 9 months (then 22.99%)
    1%
    $0
    $15,000
    Get 3x the AIR MILES for every $25 spent at eligible AIR MILES partners, and get 1 AIR MILE for every $25 spent elsewhere.
    Get 800 AIR MILES Bonus Miles (enough for $80 towards purchases with AIR MILES Cash). Get a rate of 1.99% on balance transfers for 9 months. A 1% fee applies to transferred balances.
    BMO CashBack Mastercard
    19.99%
    1.99% for the first 9 months (then 22.99%)
    1%
    $0
    $15,000
    Earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases.
    Get 5% cash back on all eligible purchases in the first three months of card membership (up to a maximum spend of $2,000, and earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases thereafter). Plus, get a rate of 1.99% on balance transfers with a 1% balance transfer fee for nine months.
    BMO AIR MILES Mastercard For Students
    19.99%
    1.99% for the first 9 months (then 22.99%)
    1%
    $0
    $15,000
    Get 3x the AIR MILES for every $25 spent at eligible AIR MILES partners, and get 1 AIR MILE for every $25 spent elsewhere.
    Get 800 AIR MILES Bonus Miles (enough for $80 towards purchases with AIR MILES Cash). Get a 1.99% introductory interest rate on balance transfers for 9 months. A 1% fee applies to balance amounts transferred.
    BMO CashBack Mastercard For Students
    19.99%
    1.99% for the first 9 months (then 22.99%)
    1%
    $0
    $15,000
    Earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases.
    Get up to 5% cash back in the first three months (up to a maximum spend of $2,000, and earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases thereafter). Plus, get a rate of 1.99% on balance transfers for 9 months, with a 1% fee for every transferred balance.
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    Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Benefits with this card Description
    American Express Cobalt Card
    19.99%
    21.99%
    $120
    N/A
    Earn 5 Membership Rewards points per $1 spent at eligible grocery stores, restaurants, bars, cafés and food delivery services, and earn 2 Membership Rewards points per $1 spent at eligible gas stations, and on transit and travel purchases, and earn 1 Membership Rewards point per $1 spent elsewhere. Terms apply
    Earn up to 45,000 bonus Membership Rewards points. In your first year as a new Cobalt Cardmember, earn 2,500 Membership Rewards points for each monthly billing period in which you spend $500 on your card (for a total of 30,000 points in a year). Plus, earn a Welcome Bonus of 15,000 Membership Rewards points when you spend a total of $3,000 in purchases on your Card in your first 3 months of Cardmembership. Apply by May 5, 2021.
    BMO AIR MILES World Elite Mastercard
    19.99%
    22.99%
    $0 annual fee for the first year ($120 thereafter)
    $80,000
    Get 1 AIR MILE for every $10 spent on eligible purchases.
    Earn a bonus of up to 2,000 AIR MILES. Terms apply. Plus, get the annual fee of $120 waived in the first year.
    American Express AIR MILES Platinum Credit Card
    20.99%
    21.99%
    $120
    N/A
    Earn 1 AIR MILE for every $5 spent on eligible food, drink, gas and transit purchases (up to an annual spend of $30,000), and earn 1 AIR MILE for every $10 spent on all other eligible purchases (and after the $30,000 annual spend)
    Earn a Welcome Bonus of 3,000 AIR MILES when you spend at least $1,500 in eligible purchases within the first three months.
    American Express Aeroplan Card
    30% annual interest rate applies to balances not paid in full each month
    N/A
    $120
    N/A
    Earn 2x the points on eligible purchases made directly with Air Canada and Air Canada vacations, 1.5x the points on eligible dining and food delivery purchases and 1x the points on everything else.
    Earn up to 15,000 Welcome Bonus Aeroplan points and a bonus Buddy Pass as a new cardmember.
    BMO eclipse Visa Infinite
    20.99%
    23.99%
    $0 annual fee for the first year ($120 thereafter)
    $60,000
    Earn 5x the BMO Points for every $1 spent on groceries, dining in and out, gas and transit.
    Get up to 40,000 points and the $120 annual fee waived in the first year. Earn 25,000 points after you spend $3,000 in the first 3 months and get 15,000 points on your first anniversary.
    Marriott Bonvoy American Express Card
    19.99%
    21.99%
    $120
    N/A
    Receive 5 Marriott Bonvoy™ points per dollar spent on eligible purchases at participating Marriott Bonvoy™ properties and 2 points on all other spend. Terms apply
    Receive 50,000 bonus Marriott Bonvoy™ points when you charge $1,500 in the first three months of card membership. Terms apply
    Choice Card from American Express
    19.99%
    23.99%
    $0
    N/A
    Earn 1 American Express Membership Point for every $1 you spend on purchases.
    Earn a Welcome Bonus of 10,000 Membership Rewards points when you charge $1,000 in purchases to your card in the first 3 months of Cardmembership.
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    Name Product Purchase Interest Rate Cash Advance Rate Cash Back Rate Annual Fee Minimum Income Reward
    SimplyCash Preferred Card from American Express
    19.99%
    21.99%
    2%
    $99
    N/A
    Earn 2% cash back on all eligible purchases
    Earn 10% cash back on all eligible purchases (up to $400 in cash back) for the first four months of Cardmembership.
    SimplyCash Card from American Express
    19.99%
    21.99%
    1.25%
    $0
    N/A
    1.25% cash back rate on all purchases when your welcome offer ends. No cap
    Earn 2.5% cash back on all eligible purchases in your first three months (up to a maximum spend of $6,000, or $150 in cash back).
    Tangerine Money-Back Credit Card
    1.95% intro APR for the first 6 months, 19.95% thereafter
    19.95%
    2%
    $0
    $12,000
    Earn 2% cash back in two categories of your choice (or three categories if you open a Tangerine Savings Account and directly deposit your cash back into the account), and 0.5% cash back on everything else.
    Get a 1.95% interest rate on balance transfers for the first six months (valid within the first 30 days of account opening).
    BMO CashBack World Elite Mastercard
    19.99%
    22.99%
    1.5%
    $0 annual fee for the first year ($120 thereafter)
    $80,000
    Earn 1.5% cash back on all eligible purchases.
    Get up to 10% cash back in your first 3 months and the $120 annual fee waived in the first year.
    Shell CashBack Mastercard from BMO
    19.99%
    22.99%
    1.5%
    $0
    $15,000
    Get 1.5% cash back at participating Shell locations in Canada (up to a maximum spend of $2,500 in any monthly billing period), and get 0.5% cash back everywhere else.
    Get $50 in cash back bonuses once you charge your first eligible purchase to your card. Plus, earn 1% cash back for the first 6 months on all eligible purchases.
    BMO Cashback Business Mastercard
    19.99%
    22.99%
    1.75%
    $0
    N/A
    Earn 1.5% cash back on eligible gas purchases, office supplies and on cell phone and internet recurring payments, earn 1.75% cash back at participating Shell stations, and earn 0.75% on all other eligible card purchases.
    Get 10% cash back on gas, office supplies, cell phone bills and internet bills for 3 months.
    BMO CashBack Mastercard
    19.99%
    22.99%
    0.5%
    $0
    $15,000
    Earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases.
    Get 5% cash back on all eligible purchases in the first three months of card membership (up to a maximum spend of $2,000, and earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases thereafter). Plus, get a rate of 1.99% on balance transfers with a 1% balance transfer fee for nine months.
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    Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Benefits with this card Description
    BMO CashBack Mastercard
    19.99%
    22.99%
    $0
    $15,000
    Earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases.
    Get 5% cash back on all eligible purchases in the first three months of card membership (up to a maximum spend of $2,000, and earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases thereafter). Plus, get a rate of 1.99% on balance transfers with a 1% balance transfer fee for nine months.
    Tangerine Money-Back Credit Card
    1.95% intro APR for the first 6 months, 19.95% thereafter
    19.95%
    $0
    $12,000
    Earn 2% cash back in two categories of your choice (or three categories if you open a Tangerine Savings Account and directly deposit your cash back into the account), and 0.5% cash back on everything else.
    Get a 1.95% interest rate on balance transfers for the first six months (valid within the first 30 days of account opening).
    Choice Card from American Express
    19.99%
    23.99%
    $0
    N/A
    Earn 1 American Express Membership Point for every $1 you spend on purchases.
    Earn a Welcome Bonus of 10,000 Membership Rewards points when you charge $1,000 in purchases to your card in the first 3 months of Cardmembership.
    Shell AIR MILES Mastercard from BMO
    19.99%
    22.99%
    $0
    $15,000
    Get 3x the AIR MILES for every $25 spent at eligible AIR MILES partners, and get 1 AIR MILE for every $25 spent elsewhere.
    Get 800 AIR MILES Bonus Miles (enough for $80 towards purchases with AIR MILES Cash).
    Shell CashBack Mastercard from BMO
    19.99%
    22.99%
    $0
    $15,000
    Get 1.5% cash back at participating Shell locations in Canada (up to a maximum spend of $2,500 in any monthly billing period), and get 0.5% cash back everywhere else.
    Get $50 in cash back bonuses once you charge your first eligible purchase to your card. Plus, earn 1% cash back for the first 6 months on all eligible purchases.
    BMO Rewards Mastercard
    19.99%
    22.99%
    $0
    $15,000
    Get 1 BMO Reward point for every $1 spent on eligible purchases, and get 2 BMO Rewards points for every $1 spent at participating National Car Rental and Alamo Rent A Car locations.
    Get a bonus of 15,000 BMO Rewards points. Plus, get a rate of 1.99% on balance transfers for 9 months. A 1% fee applies to transferred balances.
    BMO IGA AIR MILES Mastercard
    19.99%
    22.99%
    $0
    $15,000
    Get 3x the AIR MILES for every $25 spent on eligible purchases at IGA stores and at participating AIR MILES partners, and get 1 AIR MILE for every $25 spent elsewhere.
    Get 800 AIR MILES Bonus Miles (enough for $80 towards purchases with AIR MILES Cash).
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    Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Reward
    BMO Preferred Rate Mastercard
    12.99%
    12.99%
    $20
    $15,000
    Take advantage of an introductory balance transfer offer, annual fee waiver in the first year, and low purchase and cash advance interest rates.
    Get a rate of 3.99% on balance transfers for 9 months with a 1% transfer fee. Plus, get the $20 annual fee waived in the first year.
    HSBC +Rewards™ Mastercard®
    11.9%
    11.9%
    $25
    N/A
    Earn 2 Points for every $1 spent on eligible dining or entertainment purchases.
    Get a low interest rate for purchases, cash advances and balance transfers.
    BMO Rewards Business Mastercard
    14.99%
    22.99%
    $0 annual fee for the first year ($120 thereafter)
    N/A
    Earn 3 BMO Rewards points for every $1 you spend on gas, office supplies, cell phone bills and internet bills, and earn 1.5 BMO Rewards points for every $1 you spend elsewhere.
    Get up to $470 in value in your first year. Get 50,000 BMO Rewards points when you spend $5,000 in the first three months. Plus, the primary cardholder will get the first year $120 annual fee waived.
    Business Platinum Card from American Express
    N/A
    N/A
    $499
    N/A
    Earn 1.25 Membership Rewards points for every $1 spent on eligible purchases
    Earn a Welcome Bonus of 50,000 Membership Rewards points when you charge $7,000 in purchases to your Card in your first three months of Cardmembership.
    American Express Business Gold Rewards Card
    N/A
    N/A
    $250
    N/A
    Earn 2 Membership Rewards points for every $1 spent on eligible purchases at select American Express merchant suppliers in Canada (choose 3 suppliers), and earn 1 Membership Reward point for every $1 spent on eligible purchases elsewhere
    Earn a Welcome Bonus of 30,000 Membership Rewards points when you spend at least $5,000 on eligible purchases within the first three months
    Scotiabank Value Visa Card
    12.99%
    12.99%
    $29
    $12,000
    Save on interest for 6 months by consolidating your higher-rate balances with the balance transfer offer, and get an on-going 12.99% interest rate on purchases, cash advances and balance transfers.
    Get a 0.99% introductory interest rate on balance transfers with a 0% transfer fee for the first 6 months. Apply by February 28, 2021.
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    Credit card terms you should know

    Here are a few important terms you should know while you look for a credit card.

    Credit card terms

    APR

    You’ll typically see a credit card’s interest rate expressed as an APR, short for annual percentage rate. This makes it easier to compare interest rates between cards.

    Some cards offer an introductory APR. An intro APR means you’ll receive a special APR for a specified period of time, after which your APR will increase. For example, you may get a 0% intro purchase APR for 12 months, after which your APR will revert to 20%. To avoid accruing interest, pay off your balances before the 12 months are up.

    APR statement

    Fixed vs. variable interest rates

    A fixed interest rate stays the same for the entire time you have your credit card. A card with a variable interest rate means that your APR is typically pegged to the prime rate — this is the interest rate banks give to those they consider most creditworthy. Your provider will usually use the prime rate plus a certain percentage to determine your APR.

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    You may also see something called deferred interest. This is interest you won’t have to pay if you pay off a purchase within a specified period of time.

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    “Deferred interest” does not mean “zero interest.” If you don’t pay off your purchase in full within the specified time period, you’ll be charged interest starting from the day you swiped your card.

    Revolving credit

    A credit card offers revolving credit, which you can think of like a rechargeable battery.

    Here’s an example.

    • Let’s say your card has a $1,000 credit limit, and you make a $400 purchase.
    • That means you have $1,000 less $400 — or $600 — left in available credit.
    • At this point, you can spend only $600 more on your card before you hit your limit.

    But this is where the magic of revolving credit comes in.

    • Let’s say you now pay $300 toward your balance.
    • This raises your available credit to $900 ($600 plus $300).
    • Now you can spend up to $900 on your card. In a sense, you’ve “recharged” your card’s spending power.

    Credit cards are different from non-revolving credit sources, which don’t offer more credit after they’re paid off. Home loans and car loans are a few examples.

    Credit card fees

    • Annual fee. For remaining a cardholder. This is the cost you’ll pay every card year to own the card.
    • Balance transfer fee. For moving your existing credit card debt to a new credit card.
    • Cash advance fee. For using your credit card to take out cash.
    • Foreign transaction fee. For using your card outside Canada.
    • Late payment fee. For not paying at least your minimum payment after your statement due date.
    • Overlimit fee. For making a purchase that exceeds your credit limit.
    • Returned payment fee. For sending a payment that bounces — for instance, if you enter your chequing account number incorrectly.
    • Returned cheque fee. For paying with a cheque that’s tied to your credit card that’s returned due to insufficient funds or a closed account.
    • Minimum payment requirement. While not exactly a credit card fee, some merchants have minimum purchase requirements if you want to use your credit card.

    Balance transfer

    When you initiate a balance transfer, you move your existing credit card debt onto a new card. Any debt you move will be subject to your new card’s balance transfer APR.

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    Some cards come with an introductory balance transfer rate. With this intro rate, you’ll get a lower APR on your transfer for a specified amount of time, after which your APR reverts to the usual balance transfer rate. To avoid accruing interest, pay off your balances before your intro APR expires.

    Balance transfers usually come with fees — typically a flat rate or a percentage of each transfer, whichever is the higher fee. Also, they might not be subject to the grace periods you get with purchases.

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    Cash advance

    When you get a cash advance, you use your credit card to take out cash. For example, you might use your card at an ATM. Purchases like gambling chips, gift cards or traveler’s checks may be classified as cash advances.

    It’s a good idea to avoid cash advances because they tend to attract high APRs and fees. Also, they often don’t come with grace periods for interest.

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    Credit utilization ratio

    Your credit utilization ratio is the relationship between how much you owe on your credit card compared with your total credit limit.

    For example:

    1. Say you have three credit cards with different credit limits: $1,000, $2,000 and $3,000. This means you have $6,000 in total credit.
    2. You carry a $1,000 balance on your first card and a $2,000 balance on your second card. You carry no balance on your third card. In total, you carry a $3,000 balance across all of your cards.
    3. Overall, you have a $3,000 balance owing and $6,000 in total credit. Your credit utilization is $3,000 divided by $6,000 — or 50%. If you had a $2,000 total balance, your credit utilization would be $2,000 divided by $6,000 — or 33%. And so on.

    Your credit utilization factors heavily into your credit score. It’s a good idea to keep it below 30% at all times.

    Issuers vs. networks

    A credit card is usually offered by a bank. But if that’s so, why does your card include a logo for Visa or Mastercard?

    It’s because credit cards are supported by both issuers and networks.

    • An issuer is a bank or credit union that distributes credit cards. You borrow money from your issuer when you swipe your card. Examples of issuers include RBC, BMO, Scotiabank, TD Bank, and CIBC.
    • A network is a company that processes credit card transactions. The biggest card networks in Canada are Visa, Mastercard, and American Express. In fact, your credit card numbers are directly related to your card network.

    Your issuer is the one you’ll make payments to and call if you have problems with your card. You’ll probably contact your card network more infrequently — for example, when you want to take advantage of benefits such as Visa Concierge or Mastercard roadside assistance.

    Our guide to the difference between issuers and networks

    Credit cards and credit scores

    Whenever you apply for credit from a lender — for a mortgage, car loan or credit card — your credit score matters. Your credit score is a numerical measurement of how trustworthy you are as a borrower. Lenders check your credit score to gauge their chances of being repaid. Here’s a simple rule of thumb: the higher your credit score, the more likely you’ll be approved for a credit card.

    Here are a few important factors that affect your credit score and, in turn, your approval odds:

    • Credit utilization ratio. This is the amount of credit you’re using relative to your total available credit. Lenders want to see low credit utilization — it implies you manage debt responsibly and are unlikely to default on your payments.
    • Payment history. One of the best ways lenders can predict whether you’ll make payments on time is to check whether you’ve already been doing so with other debt.
    • Length of credit history. Card providers can more accurately predict how reliably you’ll make payments if you have a long credit history.

    Do I need a credit card?

    It’s natural to be nervous to apply for a credit card. The truth is, there are good reasons to get a card, as well as situations in which you shouldn’t get one. Here are a few arguments for both.

    When you should get a credit card

    • Build or rebuild your credit. A credit card isn’t the only way to build credit, but it’s an excellent choice. When you use your card and consistently pay your bills on time, your credit score will increase. It’s a great idea to start as soon as you feel ready to build credit.
    • It’s a more convenient way to pay. Instead of carrying a lot of cash or writing cheques, you can simply swipe your card.
    • Make a large purchase and pay it off over time. If this is your primary reason for getting a credit card, consider whether the purchase is essential. Also, make sure you can pay off your purchase in good time.
    • Earn rewards. As you spend with your credit card, you may earn cash back that you can redeem for bank deposits or statement credit. Or you may earn points or miles that you can redeem for travel, gift cards and more.
    • Make safer payments. With a credit card, money leaves your bank account only when you pay your statement. Because of this, a credit card could be more secure than a debit card. With a debit card, money is deducted from your account right away.

    When you shouldn’t get a credit card

    • Have difficulty controlling spending. If you habitually overspend, consider holding off on a credit card. You may rack up huge amounts of debt that will be difficult to repay. Work on solving your spending problem, or stick to debit cards.
    • Can’t pay larger amounts toward your monthly balances. The longer you carry a balance, the more interest you’ll accumulate. Interest can be surprisingly expensive in the long run.
    • Don’t have the right credit score. Find out what your credit score is before applying for a card. It’s certainly no fun getting denied. Also, applying for many cards can significantly affect your credit score.

    What is the cost of owning a credit card?

    Owning a credit card isn’t always free. There are several costs to watch out for, from the well-advertised to the non-obvious.

    • Fees.
      The annual fee is typically the cost you see first. It commonly ranges from $0 to hundreds of dollars, but it can reach the $1,000 range and beyond. You’ll also want to be aware of foreign transaction fees and avoid cash advance fees, overlimit fees and the like.
    • Interest.
      If you don’t pay off your balance by the end of your card’s grace period, you’ll start accruing interest. Interest can snowball faster than you think, so consider paying your bill in full each billing cycle.
    • Changes to your credit score.
      If you keep high balances on your credit cards — or, worse, miss payments — your credit score will drop. This, in turn, will result in higher interest rates when you’re ready to apply for loans. Over the long run, this can cost a lot.

    How to choose a credit card

    With so many credit cards on the market, there’s no “perfect” card. Here are a few factors to compare to help you decide. Once you understand credit card features, you’ll be on your way to using cards responsibly.

    Comparing credit card factors

    Fees

    Consider whether you’re willing to pay an annual fee for your card. If you’re not, there are plenty of no-annual-fee products to choose from.

    Also, consider the things you’re likely to do with your card, and avoid the corresponding fees. For example, if you’ll use your card internationally, look for a product with no foreign transaction fees.

    If you’ll initiate a balance transfer on your card, you might like a product that waives transfer fees.

    APR

    Before applying for a card, check its pricing and terms. There, you’ll find the interest rates you’ll pay for various transaction types. The APR is especially important if you plan on carrying a balance from month to month.

    Rewards

    Check if the card’s bonus rewards match with your typical spending. If you’re a foodie, for example, you might like a card that offers accelerated rewards on dining purchases.

    If your supermarket bills are substantial, look for a card with the best rewards on groceries.

    If you spend relatively evenly across many categories, you might like a card with flat-rate rewards.

    Benefits

    Particularly if your card has an annual fee, there will likely be benefits you can enjoy. The best travel cards often have perks like travel credits, airport lounge access and hotel status upgrades.

    Your financial situation

    It’s best to get a credit card only if you have your finances in order. If you have structural financial problems like chronic overspending, a credit card won’t help — instead, it could make things worse.

    It’s easy to rack up large balances on credit cards, especially because most cards don’t require you to pay your bill in full each month. Paying the minimum each month is a particularly good way to find yourself deep in debt.

    Beyond considering whether you can spend responsibly, think about how a card can help you reach your financial goals. Maybe you need to make a big purchase and pay it off over time. In that case, a 0% APR card could be a better choice. If you need to escape from high interest rates on your current card, you could apply for a balance transfer card.

    Your credit history

    Your credit history will largely determine which credit cards you’ll qualify for. The higher your credit score, the more choices you’ll have.

    It will be tougher to get a credit card with fair credit, but you do have options. However, it’s unlikely that you’ll get a card that offers rewards.

    If you have poor credit, most cards will be out of reach. Consider a secured credit card to rebuild your credit.

    Your age

    If you’re young, you probably don’t have much of a credit history. Consider starting with a student credit card or secured credit card. Both cards can help you learn how to use credit responsibly.

    The older you are, the more likely you are to have a credit history. Check your credit score and apply for the cards that you have a good chance of being approved for.

    Your income

    Income can be a significant factor when a card provider decides whether to approve you. The reason is simple: your provider wants to know you have the ability to repay your debt. All else being equal, the higher your income, the more likely your provider is to approve you.

    You don’t necessarily have to be employed to get a credit card. As long as you have some source of income, you’re eligible.

    Your personal interests

    You can find a card that complements your interests. For example, if you like staying at a certain hotel chain, you can get a card that rewards you for spending money there.

    You’ll also find brand-specific cards. Wherever you like to spend money, see if there’s a card offered there that fits your interests.

    How to apply for your first credit card

    When you apply for a credit card, your card provider may want to verify your income. They may also ask for documents to verify your identity.

    While most providers require you to apply for a credit card in your own name, some will let you apply for a joint account with a partner. If you want to give others access to your account, add them as authorized users.

    We’ve assembled a few common application requirements you can expect when applying for a credit card.

    Bottom line

    It’s a great feeling when you finally get your first credit card. When you do, resolve to build good financial habits.

    Keep your spending in check and pay off your balance in full each month. These are the keys to using a credit card like a pro, building your credit score and opening new financial opportunities. If you’re using a rewards card, enjoy the perks that come from your usage!

    Ready to take the plunge? Compare credit cards now.

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