How do credit cards work? A beginner’s guide (2020)

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

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Pile of credit cards fanned out

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.

American Express Cobalt Card

American Express Cobalt Card

19.99 % APR

Purchase interest rate

Eligibility criteria, terms and conditions, fees and charges apply

American Express Cobalt Card

Apply today and earn up to 5 points for every dollar you spend on eligible purchases. Terms apply.

  • Purchase interest rate: 19.99%
  • Cash advance rate: 22.99%
  • Annual fee: $120
  • Credit rating: Fair, Good, Excellent
  • Minimum age: Age of majority in province/territory of residence
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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.

    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%
    22.99%
    $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 40,000 Membership Rewards points. In the first year, earn 2,500 Membership Rewards points for each billing period when you charge at least $500 in eligible purchases to your card (for a total earn of up to 30,000 Membership Rewards). Plus, earn up to 10,000 Membership Rewards points when you spend a total of $3,000 in purchases in your first three months
    HSBC +Rewards™ Mastercard®
    11.9%
    11.9%
    $0 annual fee for the first year ($25 thereafter)
    N/A
    Earn 2 Points for every $1 spent on eligible dining or entertainment purchases.
    Earn 10,000 Points ($50 travel value). Plus, get a full annual fee rebate for the Primary Cardholder for the first year. Apply by June 29, 2020. This offer is only available to residents of Canada other than the province of Quebec. Conditions apply.
    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).
    Earn a bonus of up to 35,000 BMO Rewards points with a minimum spend of $3,000 on eligible purchases in the first three months of card membership ($250 travel value to be used towards a flight booked through bmorewards.com). Plus, get the $150 annual fee waived in the first year.
    HSBC World Elite® Mastercard®
    19.9%
    22.9%
    $0 annual fee for the first year ($149 thereafter)
    $80,000
    Earn 3% in travel rewards on all eligible travel purchases (6 Points per $1 spent) and earn 1.5% in travel rewards on all other eligible purchases (3 Points per $1 spent).
    Earn up to 60,000 Points ($300 travel value). Plus, get a full annual fee rebate for the Primary Cardholder for the first year. Apply by June 29, 2020. This offer is only available to residents of Canada other than the province of Quebec. Conditions apply.
    Scotiabank Passport  Visa Infinite Card
    19.99%
    22.99%
    $139
    $60,000
    Earn 2 Scotia Rewards points for every $1 spent on eligible grocery store, dining, entertainment and daily transit purchases, and earn 1 Scotia Rewards point for every $1 spent elsewhere.
    Earn up to a total bonus of 40,000 Scotia Rewards points (up to a $400 travel value) in your first year. Earn 30,000 Bonus Scotia Rewards points when you spend at least $1,000 on eligible purchases within the first three months. Apply by July 1, 2020. Plus, earn 10,000 Bonus Scotia Rewards points each year when you spend at least $40,000 annually on eligible purchases (and earn 2,000 Bonus Scotia Rewards points for every additional $10,000 in purchases thereafter).
    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.
    Scotia Momentum No-Fee Visa Card
    7.99% intro APR for the first 6 months, 19.99% thereafter
    22.99%
    $0
    $12,000
    Get 1% cash back on all eligible gas station, grocery store and drug store purchases and recurring bill payments, and get 0.5% cash back on all other eligible purchases.
    Get a 7.99% introductory interest rate on all eligible purchases for the first 6 months. Apply by July 1, 2020.
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    Compare up to 4 providers

    Name Product Purchase Interest Rate Balance Transfer Rate Annual Fee Minimum Income Reward Description
    BMO Preferred Rate Mastercard
    12.99%
    3.99% for the first 9 months (then 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.
    Scotiabank Value Visa Card
    12.99%
    0.99% for the first 6 months (then 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 July 1, 2020.
    No-Fee Scotiabank Value Visa Card
    16.99%
    3.99% for the first 6 months (then 16.99%)
    $0
    $12,000
    Save with a low interest rate, no annual fee and a balance transfer offer.
    Get a 3.99% introductory interest rate on balance transfers with a 0% balance transfer fee for the first 6 months. Apply by July 1, 2020.
    Tangerine World Mastercard
    19.95%
    1.95% for the first 6 months (then 19.95%)
    $0
    $60,000
    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).
    Tangerine Money-Back Credit Card
    19.95%
    1.95% for the first 6 months (then 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).
    BMO AIR MILES Mastercard For Students
    19.99%
    1.99% for the first 9 months (then 22.99%)
    $0
    $15,000
    Earn 2 AIR MILES for every $20 spent at eligible AIR MILES partners, and earn 1 AIR MILE for every $20 spent elsewhere.
    Receive up to 800 AIR MILES Bonus Miles. Plus, 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%)
    $0
    $15,000
    Get 1% cash back on all eligible purchases.
    Get up to 5% cash back in the first three months (up to a maximum spend of $2,000). 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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    Compare up to 4 providers

    Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Benefits with this card Description
    American Express Cobalt Card
    19.99%
    22.99%
    $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 40,000 Membership Rewards points. In the first year, earn 2,500 Membership Rewards points for each billing period when you charge at least $500 in eligible purchases to your card (for a total earn of up to 30,000 Membership Rewards). Plus, earn up to 10,000 Membership Rewards points when you spend a total of $3,000 in purchases in your first three months
    Scotiabank Gold American Express Card
    19.99%
    22.99%
    $120
    $12,000
    Earn 5 Scotia Rewards points per $1 spent on eligible grocery, dining and entertainment purchases, 3 points per $1 spent on eligible gas, transportation and select streaming services, and 1 point per $1 spent on eligible purchases elsewhere.
    Earn 20,000 bonus Scotia Rewards points when you spend at least $1,000 on eligible purchases in the first 3 months. Apply by July 1, 2020.
    The Platinum Card from American Express
    N/A
    N/A
    $699
    N/A
    Earn 3 Membership Rewards points for every $1 spent on eligible dining in Canada, 2 Membership Rewards points for every $1 spent on eligible travel purchases as well as hotel and car rental bookings made with American Express Travel, and earn 1 Membership Reward point for every $1 spent on all other eligible purchases
    As a new Platinum Cardmember, earn up to 60,000 Membership Rewards points in the fist six months. Earn a Welcome Bonus of 50,000 Membership Rewards points when you spend at least $3,000 on eligible purchases within the first three months. Receive an additional 10,000 Membership Rewards points after six months of cardmembership
    Scotiabank Passport  Visa Infinite Card
    19.99%
    22.99%
    $139
    $60,000
    Earn 2 Scotia Rewards points for every $1 spent on eligible grocery store, dining, entertainment and daily transit purchases, and earn 1 Scotia Rewards point for every $1 spent elsewhere.
    Earn up to a total bonus of 40,000 Scotia Rewards points (up to a $400 travel value) in your first year. Earn 30,000 Bonus Scotia Rewards points when you spend at least $1,000 on eligible purchases within the first three months. Apply by July 1, 2020. Plus, earn 10,000 Bonus Scotia Rewards points each year when you spend at least $40,000 annually on eligible purchases (and earn 2,000 Bonus Scotia Rewards points for every additional $10,000 in purchases thereafter).
    HSBC +Rewards™ Mastercard®
    11.9%
    11.9%
    $0 annual fee for the first year ($25 thereafter)
    N/A
    Earn 2 Points for every $1 spent on eligible dining or entertainment purchases.
    Earn 10,000 Points ($50 travel value). Plus, get a full annual fee rebate for the Primary Cardholder for the first year. Apply by June 29, 2020. This offer is only available to residents of Canada other than the province of Quebec. Conditions apply.
    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 3,000 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%
    22.99%
    $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 2,000 AIR MILES when you spend at least $1,500 in eligible purchases within the first three months.
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    Compare up to 4 providers

    Name Product Purchase Interest Rate Cash Advance Rate Cash Back Rate Annual Fee Minimum Income Reward
    SimplyCash Preferred Card from American Express
    19.99%
    22.99%
    2%
    $99
    N/A
    Earn 2% cash back on all eligible purchases
    Earn 5% cash back on all eligible purchases in your first six months (up to a maximum spend of $6,000, or $300 in cash back).
    Scotia Momentum Visa Infinite Card
    20.99%
    22.99%
    4%
    $120
    $60,000
    Earn 4% cash back for every $1 spent on eligible grocery purchases & recurring bill payments, 2% per $1 spent on eligible gas purchases & public transit, and 1% per $1 spent on all other eligible purchases.
    Get 10% cash back on all eligible purchases for the first 3 months (up to $2,000 in total purchases). Plus, pay no annual fee in the first year, including on supplementary cards. (A total Welcome Offer value of $350). Apply online by April 30, 2020.
    SimplyCash Card from American Express
    19.99%
    22.99%
    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).
    Scotia Momentum  Mastercard Credit Card
    7.99% intro APR for the first 6 months, 19.99% thereafter
    22.99%
    1%
    $0
    $12,000
    Get 1% cash back on all eligible gas station, grocery store and drug store purchases and recurring bill payments, and get 0.5% cash back on all other eligible purchases.
    Get a 7.99% introductory interest rate on all eligible purchases for the first 6 months. Apply by July 1, 2020.
    Scotia Momentum No-Fee Visa Card
    7.99% intro APR for the first 6 months, 19.99% thereafter
    22.99%
    1%
    $0
    $12,000
    Get 1% cash back on all eligible gas station, grocery store and drug store purchases and recurring bill payments, and get 0.5% cash back on all other eligible purchases.
    Get a 7.99% introductory interest rate on all eligible purchases for the first 6 months. Apply by July 1, 2020.
    Scotia Momentum Visa Card
    19.99%
    22.99%
    2%
    $39
    $12,000
    Earn 2% cash back on all eligible gas station, grocery store and drug store purchases and on recurring bill payments (up to a $25,000 annual spend), and earn 1% cash back on all other eligible purchases (and on all eligible purchases once the $25,000 annual spend is reached).
    Get a 2.99% introductory rate on balance transfers and a 0% balance transfer fee for the first 6 months. Apply by July 1, 2020.
    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.
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    Compare up to 4 providers

    Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Benefits with this card Description
    Scotiabank SCENE Visa Card
    19.99%
    22.99%
    $0
    $12,000
    Earn 5 SCENE points per $1 spent at participating Cineplex theatres or cineplex.com, and earn 1 SCENE point per $1 spent on eligible purchases elsewhere.
    Earn 2,500 bonus SCENE points when you spend a minimum of $500 on eligible purchases in the first three months. Apply by July 1, 2020.
    Scotia Momentum No-Fee Visa Card
    7.99% intro APR for the first 6 months, 19.99% thereafter
    22.99%
    $0
    $12,000
    Get 1% cash back on all eligible gas station, grocery store and drug store purchases and recurring bill payments, and get 0.5% cash back on all other eligible purchases.
    Get a 7.99% introductory interest rate on all eligible purchases for the first 6 months. Apply by July 1, 2020.
    BMO AIR MILES Mastercard
    19.99%
    22.99%
    $0
    $15,000
    Get 2 AIR MILES for every $20 spent at eligible AIR MILES partners, and get 1 AIR MILE for every $20 spent elsewhere.
    Earn up to 800 AIR MILES Bonus Miles. Plus, get a rate of 1.99% on balance transfers for 9 months. A 1% fee applies to transferred balances.
    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.
    Earn a bonus of up to 20,000 BMO Rewards points. Plus, get a rate of 1.99% on balance transfers for 9 months. A 1% fee applies to transferred balances.
    Tangerine Money-Back Credit Card
    19.95%
    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).
    BMO IGA AIR MILES Mastercard
    19.99%
    22.99%
    $0
    $15,000
    Get 2 AIR MILES for every $20 spent on eligible purchases at IGA stores and at participating AIR MILES partners, and get 1 AIR MILE for every $20 spent elsewhere.
    Get up to 800 AIR MILES Bonus Miles.
    Tangerine World Mastercard
    19.95%
    19.95%
    $0
    $60,000
    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).
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    Compare up to 4 providers

    Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Reward
    HSBC +Rewards™ Mastercard®
    11.9%
    11.9%
    $0 annual fee for the first year ($25 thereafter)
    N/A
    Earn 2 Points for every $1 spent on eligible dining or entertainment purchases.
    Earn 10,000 Points ($50 travel value). Plus, get a full annual fee rebate for the Primary Cardholder for the first year. Apply by June 29, 2020. This offer is only available to residents of Canada other than the province of Quebec. Conditions apply.
    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.
    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 40,000 Membership Rewards points when you spend at least $5,000 on eligible purchases within the first three months
    American Express AeroplanPlus Platinum Card
    N/A
    N/A
    $499
    N/A
    Earn 1.25 Aeroplan Miles for every $1 spent up to the first $25,000 annual spend, and earn 1.5 Aeroplan Miles for every $1 spent over $25,000
    Receive 40,000 bonus Aeroplan Miles after spending $3,000 in the first three months of card membership
    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