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What is a Credit Card? A Beginner’s Guide to Credit Cards

Find out how credit cards work including interest rates, fees and how to apply. Plus, learn why your credit score matters.

Using a credit card responsibly can improve your credit score, open up new financing opportunities, help you qualify for favourable interest rates and better loan terms — and in some cases, earn rewards. If you’re new to using credit and credit cards, this beginner’s guide will tell you all you need to know, including fees, features, interest rates, types of cards and how to apply.

What is a credit card?

A credit card works much like a debit card, except the money you spend is borrowed and must be repaid (often with interest). Essentially, a credit card is an unsecured revolving line of credit. You can spend funds whenever you want — all at once or in multiple purchases over time — up to a predetermined credit limit.

You only make repayments when you use funds, so if you don’t charge any purchases to your card, you don’t owe anything. Interest fees are only charged when you don’t pay off your credit card balance (usually within a short time frame called a grace period).

At the end of your billing cycle, which is usually around a month, your card issuer sends a statement showing what you spent and the minimum payment due. You must pay this minimum amount in order to avoid penalty fees (over and above the interest charged on the balance owed) and to keep using the credit card. To avoid paying interest, you must pay the balance owed on the credit card in full.

A credit card is…

  • A convenient way to pay. Credit cards make it easy to make online purchases. They make it easy to avoid carrying large amounts of cash and, yet, you can still make large purchases by charging it to your credit card.
  • A way to build your credit score. A strong credit score can help you get a mortgage, loans with competitive interest rates and more.
  • Credit cards are more secure than cash. Credit card issuers have robust fraud departments, and many cards come with purchase protection to guard against unauthorized purchases. Additionally, you don’t need to keep cash on your person when out in public.

A credit card is not…

  • Free money. Whenever you swipe your card, you’ll need to pay for your purchases sooner or later. Furthermore, you’ll pay interest if you carry a balance on your card month to month.
  • A debit card. When you swipe a debit card, money is immediately taken out of your bank account. With a credit card, swiping means borrowing money from your card provider. You have to pay it back.
  • An ATM card. You can use your credit card at many locations, not just at ATMs. However, if you use your credit card at an ATM, watch out for high cash advance interest rates.
  • A loan. You don’t have to obtain money from your bank in advance. You’ll only owe money to your bank or provider when you make a purchase, meaning you’ll only pay interest on the amount that you use. However, like a loan, you usually must pass a credit check to get approved for a credit card.
  • Unlimited money. Your card will come with a credit limit — the maximum amount you can carry on your card.

What credit score do I need to get a credit card?

Although you can apply for some cards with bad credit, you’ll have the most options if your credit score is 650 or higher. Whenever you apply for credit from a lender, the lender will complete a credit check. This is a hard credit check, which temporarily lowers your credit score by a few points. As long as you don’t apply for too many credit products too often, your score will bounce back soon.

Lenders use the information in your credit report to assess whether you’re likely to default on debt. The higher your credit score, the more likely you’ll be approved for a credit card. Several factors play into your score, including:

  • Credit utilization ratio. This is the amount of credit you use 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.

If approved, make payments on time and keep your overall debt load low in order to increase your score.

What credit score do I need to get a credit card?

How does credit card interest work?

As you make purchases on your credit card, your debts will begin to collect interest if you don’t pay the whole balance back by the end of the interest-free period, also known as the grace period . The type of interest rate you’re charged depends on the type of transactions that make up your balance:

  • Purchase rate. The interest rate charged on everyday purchases is usually between 8.99% and 22%. You may be able to secure a low promotional interest rate when you sign up for a new card. But, this will revert back to the regular purchase rate one the promotional period expires.
  • Cash advance rate. You could be charged as high as 29.99% or more for cash advances, which includes ATM withdrawals. Usually, there is no grace period for cash advances, so interest will start to accrue immediately.
  • Balance transfer rate. If any part of your balance was transferred from another credit card, then a balance transfer rate of 0% to 22% could apply to that amount. (Some cards offer special promotional rates on balance transfers if you decide to switch cards).

Each month, you’ll receive a statement that will detail the transactions you’ve made, the total outstanding balance you have and any interest accumulating on your balance. While you’re only required to pay a minimum repayment each month (usually 1% to 3% of your total balance), it’s best to pay as much as you can to avoid interest. If you miss the minimum payment, you could be charged late payment fees.

What features do credit cards come with?

Credit cards typically come with a credit limit, grace period and contactless payment. But cards can vary with respect to many other features, so it’s important to compare options carefully to find the right balance of perks versus costs.

  • Credit limit. This is the maximum amount of money you can borrow using your credit card. This can be as low as $500 for a student credit card and as high as $20,000 for a high-income earner.
  • Interest-free days (grace period). Interest is the cost of borrowing money. It’s charged as an annual percentage rate (APR), which can vary depending on whether you’re making a purchase or cash advance. Pay your balance in full by the statement due date, and card issuers are legally required to give you at least 21 interest-free days on purchases in the next billing cycle.
  • Balance transfers. If you’re struggling to pay off an existing debt on a high-interest card, you can transfer the debt to a credit card with a different provider and get a promotional rate on the transferred balance for a limited time (up to six months or more). This will give you time to pay down your debt while paying a low or no interest rate on the balance. After the promo period is over, a regular balance transfer rate will apply, usually around 19.99%.
  • Cash advances. Using your credit card to get cash from an ATM is considered a cash advance transaction. Cash advances attract a cash advance fee and a higher interest rate that is usually charged from the moment you withdraw your cash.
  • Rewards programs. You can reward your spending by opting for a card that earns rewards or travel points when you make eligible purchases. Many of these cards also offer thousands of bonus points when you meet a spending requirement after signing up. However, these cards often come with higher annual fees since you’re being offered many more perks.
  • Contactless payments. For purchases under a certain amount — usually $100 to $200 — you can tap your credit card or mobile-pay-compatible device against a contactless reader to complete a purchase. This allows you to bypass signing or inputting your PIN into the credit card terminal.
  • Insurance coverage. Most platinum, gold and black cards offer some form of complimentary insurance. This can include everything from purchase protection insurance and extended warranty coverage to overseas medical travel insurance, car insurance and accident insurance. Most regular credit cards offer purchase protection insurance and extended warranty coverage only.
  • Extra features. Some credit cards come with extras such as airport lounge access, concierge services, invitations to exclusive events, discounts with partnered retailers and much more.

What is a credit card CVV or CVC number?

CVV is short for: card verification value or card verification code. It’s a three or four-digit number found on either the back or front of your credit card. The CVV is commonly referred to as your credit card’s security code because it’s an anti-fraud measure that must be entered when when making a purchase where you cannot enter your PIN or sign a receipt. For instance, you will be asked for your credit card’s CVV when completing an over-the-phone reservation or an online purchase.

Where do I find my credit card CVV number?
If you have a Visa or Mastercard branded credit or debit card, the credit card CVV will be a 3-digit number on the back of your card, next to your signature. If you’re using an American Express card, the CVV will be a four-digit number found on the front of your card next to your account number.

Credit card CVV scams
While the CVV number is in place to protect your credit card from fraudulent transactions or phishing scams when using your card for online or phone transactions, it’s important to know that you could still fall victim to a credit card scam. Only use your credit card on secure online or mobile sites and with trustworthy merchants. Monitor your credit card statements and report any suspicious transactions, immediately.

Different types of credit cards

Standard credit cards

  • Low interest. This type of card can offer a lower interest rate either permanently or as a promotional offer.
  • 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.

  • Cashback. You get a percentage of your spending back, either monthly or annually. 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. With these cards, you can accumulate points and redeem them for retail purchases and gift cards. Learn more about rewards cards here.

Credit repair cards

A credit repair card can help you rebuild 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 using a prepaid card, you must load it with funds, which you can do anytime.

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

  • Charge. You’re required to pay your balance in full each month. Charge cards are rare but still exist. Many cards offered by American Express are charge cards.

What are the costs of owning a credit card?

  • Repaying your balance. You must make at least the minimum payment when your statement is issued. Beyond this, you can repay as much as you like whenever you want. The minimum repayment is usually only 1% to 3% of your outstanding balance. Pay your account in full (or as much as you can) each statement period to reduce interest costs. You’ll be charged a late payment fee if you don’t repay the minimum by the statement due date.
  • Annual fee. This maintenance fee can range from $0 to hundreds of dollars, depending on the credit card. The credit card annual fee is deducted from your available credit and will accrue interest at the purchase rate if it isn’t repaid in the first statement period.
  • Interest rates. Interest is the price you pay to borrow money. Credit card interest rates are much higher than other types of financing options because most credit cards are unsecured. Financial institutions cannot repossess your assets if you default on your repayments.
  • Other fees. Other fees you may encounter include late payment fees, fees for exceeding your credit limit, rewards program membership fees, and cash advance fees.

Credit card late payment and over-limit fees

When your credit card payment is late, or you spend over your available credit limit, you will more than likely be subject to a fee from your credit card provider. With fees sitting between $25 and $38 and penalty APRs usually around 5% higher than your standard APR, it is possible to avoid them by being aware of your financial situation and your spending habits.

When you miss a payment on its due date, you will incur a late payment fee or an increased interest rate on your next billing statement. Fees typically range between $25 and $38, while rate increases will trigger a percentage rate fee, typically around 5%.

An over-limit fee is generally around $25 to $30 and is charged when you spend more than your available credit limit.

These fees can increase the amount of interest you are charged since interest rates are applied to any unpaid fees on your credit card account.

What types of credit cards are suitable for beginners?

woman with credit card pointing at the laptop screen on her husband's lap

In Canada, Visa, Mastercard, and American Express issue credit cards in partnership with banks, financial institutions, and even some retailers. Many types of credit cards are available to suit different cardholders’ needs.

For beginners, it can be wise to start with a no-frills credit card so you can understand how credit cards work before upgrading to a fancier and possibly more expensive product.

To help, here’s a list of the types of credit cards suitable for beginners:

  • Low-interest credit cards. Low-interest rate credit cards typically feature a low purchase rate of interest. This is beneficial if you don’t pay back your balance in full by the statement due date. These credit cards can also offer a low-interest rate on purchases for a promotional period. Low-interest credit cards are suited to beginners still finding their feet making repayments. Paying off a debt over a couple of months is far cheaper with a low rate credit card than a rewards or premium credit card.
  • No annual fee credit cards. This type of credit card costs nothing to own up front. However, the rates of interest can be higher than low-rate credit cards. A no-annual-fee credit card can sit unused in your wallet, and it won’t cost you a thing. These types of credit cards are suited to beginners who are looking to build their credit history but don’t want to go all-out on a credit card with lots of features.
  • Low-income credit cards. Low minimum income credit cards have a low credit limit. Typically your annual income must be about $12,000 or greater to service the minimum credit limit of $500. Low-income credit cards are typically either low-rate or low-fee credit cards. Low minimum-income credit cards are suited to beginners who either have a low income or want a low credit limit to avoid the temptation to overspend.
  • Student credit cards. Students looking to avoid paying a high annual fee and high rates of interest generally look for student credit cards when comparing products. These cards tend to offer perks that attract students, including retail and movie ticket discounts.

Compare credit cards

1 - 2 of 2
Name Product Welcome Offer Rewards Purchase Interest Rate Annual Fee Min. Credit Score Description
BMO Preferred Rate Mastercard
0.99% rate on balance transfers for 9 months
N/A
13.99%
$0 annual fee for the first year ($29 thereafter)
Min. recommended credit score: 660
Get a rate of 0.99% on balance transfers for 9 months with a 2% transfer fee. Plus, get the $29 annual fee waived by your first anniversary.
Scotiabank Value Visa Card
0% on balance transfers for 6 months
N/A
12.99%
$0 annual fee for the first year ($29 thereafter)
Min. recommended credit score: 670
Get a 0% introductory interest rate on balance transfers for the first 6 months. Plus, pay no annual fee in the first year. Apply by October 31, 2024.
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1 - 10 of 17
Name Product Welcome Offer Rewards Purchase Interest Rate Annual Fee Min. Credit Score Description
RBC Cash Back Mastercard
N/A
Up to 2% cash back
20.99%
$0
Min. recommended credit score: 650
Neo Credit Mastercard
Get $25.00 + up to 15% cash back
Up to 5% cash back
19.99% - 29.99%
$0
Min. recommended credit score: 600
Get $25 when you sign up for the Neo Financial Mastercard. Plus, earn bonuses like 15% cashback on your first purchase at most partners, and earn an average of 5% cashback at partner stores and at least 1% cashback guaranteed.
RBC ION Visa
6,000 points
1.5 points per $1 spent
20.99%
$0
Min. recommended credit score: 660
Get 6,000 Avion points when you get approved for the card.
Tangerine World Mastercard
10% cash back
Up to 2% cash back
19.95%
$0
Min. recommended credit score: 600
Earn 10% cash back (up to $100) when you spend $1,000 in the first 2 months. Valid until October 31, 2024. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
BMO CashBack Mastercard
5% cash back
Up to 3% cash back
20.99%
$0
Min. recommended credit score: 660
Get 5% cash back on all eligible purchases in the first three months of card membership (up to max. spend of $2,500). Plus, get a rate of 0.99% on balance transfers for 9 months. A 2% fee applies to transferred balances.
Tangerine Money-Back Credit Card
10% cash back
Up to 2% cash back
19.95%
$0
Min. recommended credit score: 600
Earn 10% cash back (up to $100) when you spend $1,000 in the first 2 months. Valid until October 31, 2024. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
Neo Secured Mastercard
15% cash back
4% cash back
19.99% - 29.99%
$0
Min. recommended credit score: 600
Earn bonuses like 15% cashback on your first purchase at most partners, and earn an average of 4% cashback at thousands of partners and at least 0.5% cashback guaranteed.
American Express Green Card
10,000 points
1 point per $1 spent
21.99%
$0
Min. recommended credit score: 700
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 as a new Cardmember. That’s $100 towards groceries or concert tickets.
SimplyCash Card from American Express
$100 in statement credits
Up to 2% cash back
21.99%
$0
Min. recommended credit score: 700
In your first 10 months, earn a $10 statement credit for each monthly billing period in which you spend $300 in purchases. This could add up to $100 in statement credits in the first 10 months.
Scotiabank SCENE+ Visa Card
7,500 points
Up to 2 points per $1 spent
20.99%
$0
Min. recommended credit score: 650
Earn up to 7,500 Scene+ points in the first 3 months. Apply by July 1, 2024.
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1 - 7 of 7
Name Product Welcome Offer Rewards Purchase Interest Rate Annual Fee Min. Credit Score Description
RBC Cash Back Mastercard
N/A
Up to 2% cash back
20.99%
$0
Min. recommended credit score: 650
BMO CashBack Mastercard
5% cash back
Up to 3% cash back
20.99%
$0
Min. recommended credit score: 660
Get 5% cash back on all eligible purchases in the first three months of card membership (up to max. spend of $2,500). Plus, get a rate of 0.99% on balance transfers for 9 months. A 2% fee applies to transferred balances.
Tangerine Money-Back Credit Card
10% cash back
Up to 2% cash back
19.95%
$0
Min. recommended credit score: 600
Earn 10% cash back (up to $100) when you spend $1,000 in the first 2 months. Valid until October 31, 2024. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
Neo Credit Mastercard
Get $25.00 + up to 15% cash back
Up to 5% cash back
19.99% - 29.99%
$0
Min. recommended credit score: 600
Get $25 when you sign up for the Neo Financial Mastercard. Plus, earn bonuses like 15% cashback on your first purchase at most partners, and earn an average of 5% cashback at partner stores and at least 1% cashback guaranteed.
Scotiabank SCENE+ Visa Card
7,500 points
Up to 2 points per $1 spent
20.99%
$0
Min. recommended credit score: 650
Earn up to 7,500 Scene+ points in the first 3 months. Apply by July 1, 2024.
Scotia Momentum No-Fee Visa Card
Up to 5% cash back
1% cash back
19.99%
$0
Min. recommended credit score: 650
Earn 5% cash back on all purchases for the first 3 months (up to $2,000 spend). Plus, get a 0% introductory interest rate on balance transfers for the first 6 months with no balance transfer fee. Apply by October 31, 2024.
BMO AIR MILES Mastercard
800 Miles
Up to 3x Air Miles for every $25 spent
20.99%
$0
Min. recommended credit score: 660
Get 800 AIR MILES Bonus Miles (enough for $80 towards purchases with AIR MILES Cash). Get a rate of 0.99% on balance transfers for 9 months. A 2% fee applies to transferred balances.
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1 - 4 of 4
Name Product Welcome Offer Rewards Purchase Interest Rate Annual Fee Min. Credit Score Description
BMO CashBack Mastercard For Students
5% cash back
Up to 3% cash back
20.99%
$0
Min. recommended credit score: 660
Get up to 5% cash back in the first three months (up to max. spend of $2,500).
BMO AIR MILES Mastercard For Students
800 Miles
Up to 3x Air Miles for every $25 spent
20.99%
$0
Min. recommended credit score: 660
Get 800 AIR MILES Bonus Miles (enough for $80 towards purchases with AIR MILES Cash).
Tangerine Money-Back Credit Card
10% cash back
Up to 2% cash back
19.95%
$0
Min. recommended credit score: 600
Earn 10% cash back (up to $100) when you spend $1,000 in the first 2 months. Valid until October 31, 2024. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
Scotiabank SCENE+ Visa Card
7,500 points
Up to 2 points per $1 spent
20.99%
$0
Min. recommended credit score: 650
Earn up to 7,500 Scene+ points in the first 3 months. Apply by July 1, 2024.
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How to apply for your first credit card

You can apply for most credit cards online. Be prepared to provide personal information as well as details on your income, debts and assets. Many card providers will run a credit check and let you know within 60 seconds if you’ve been approved. You should receive your card in the mail about 10 days later. The entire application process takes less than 10 minutes, provided you have the necessary information on hand.

Exact requirements will vary between providers, but generally, you’ll need:

Eligibility requirements

  • Minimum income. This is how much you need to earn every year to be eligible to apply. Low-income credit cards usually require cardholders to earn at least $12,000 annually.
  • Age. You must be over the age of majority in your province or territory (either 18 or 19 years old).
  • Residential status. You will need to be a citizen or permanent resident of Canada. Some financial institutions offer credit cards to applicants with a student or temporary resident visa.
  • Good credit history. You will likely need to have a good credit history to be eligible to apply. If you have no credit history to date, you may only be eligible for a low credit limit. As you build your credit history by using your credit card, you can apply for a limit increase in the future.

Information you’ll need to provide

  • Employment information. You’ll need to provide copies of your most recent pay stubs or bank statements to prove your income. If you’re self-employed, you’ll usually be required to submit a Notice of Assessment from the last two tax years.
  • Government-issued identification. You will need to verify your identification with the credit card company before your application can be finalized. You can do this by providing a copy of a valid driver’s license, passport or some other form of acceptable government-issued ID.
How to apply for your first credit card

How to activate a credit card

There are two main ways to activate your card: phone and online. Some card providers may also let you activate your card via their mobile app. Whichever method you choose, the process is fast and simple.

The card activation process is generally the same across all providers. Here’s how it works:

  1. Call the number on the back of your card or sign up for your provider’s online banking.
  2. Find your new card under Accounts if activating online or request card activation by phone.
  3. Follow the prompts and provide your card and personal information.

TIP: If you’re activating your card by phone, call the number given with your card when it was first mailed to you. Otherwise, you may need to provide additional information to verify you are the real cardholder.

Some card providers let you activate your card with the provider’s mobile app. In this case, the process is similar to activating your card online.

How long does it take to activate your credit card?

In general, it shouldn’t take more than a few minutes. If you’re in a hurry, use the online activation method because it’s often faster.

When can I use my credit card after activation?

You can use your credit card as soon as it’s been activated.

Should I get a credit card?

You may want to get a credit card for the following reasons:
  • 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 convenient way to pay. Instead of carrying a lot of cash, you can simply tap 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. Make sure you can pay off your purchase in a timely manner.
  • Make safer payments. Credit cards give you more protection than debit cards when things go wrong, thanks to the Consumer Credit Act.
You may NOT want to get a credit card for the following reasons:
  • It can be difficult to control 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.
  • You can’t pay off your balance. The more time you take to pay off your balance, the more interest you’ll pay. Don’t borrow if you can’t foresee paying off your balance in a reasonable time.
  • Your credit score is poor. It’s not impossible to get a credit card if you have poor credit, but your interest rate will most likely be high, and you may only qualify for a secured card with limited benefits. You may want to wait until your credit score improves before applying for a card to get favourable terms.

Why was my credit card closed for inactivity?

Credit card providers can close your card for a number of reasons, including inactivity. That’s because they want to move your unused credit limit to other card members who will actually use it.

Avoid getting your credit card account closed for inactivity by using it at least once every three months. Another option is to use the card for subscriptions and recurring charges, like Netflix or Amazon Prime.

How often should I use my card to keep it active?

Most issuers won’t disclose how long their cards can remain unused before they close the account for inactivity. Several users on social media mention having gone at least three to six months without activity before their issuer reached out to inquire about the account.

If you want to keep your card account active, try charging a few simple recurring payments to it. Your phone bill, internet service, or even your rent are good candidates. These payments alone can help keep your card account open, even if you don’t make any other purchases.

Will my credit score be affected if my card is closed for inactivity?

Yes, your credit score will be affected because of changes to your:

  • Overall utilization rate.
    When your credit card account is closed, you lose your available credit limit. This can hurt your utilization rate, which negatively affects your credit score.
  • Credit card account age.
    An old credit card that’s closed will shorten your overall credit history. Because this accounts for 15% of your credit score, it may negatively affect your credit score.

Frequently asked questions

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