Credit Card FAQ'S
What is a Credit Card?
When a business such as a bank lends you money it is called credit. A credit card essentially allows you to spend the bank’s money and pay them back later, all through the use of a small plastic card.
Credit cards are convenient, secure, and help build your credit rating if you use them responsibly. Paying for goods with a credit card also gives you the backing of the credit card company’s fraud handling measures. If your card is used fraudulently without your knowledge, the credit card company will almost certainly pay you back.
However, it’s important to remember that credit cards have annual fees and/or interest to pay. If you don’t pay off the entire balance each month, then you will pay interest on the balance. If you use a credit card at an ATM you will likely be charged a cash advance fee.
Your credit card will also have a credit limit – the maximum amount you are allowed to borrow on the credit card at one time. Once you’ve paid off some or all of the credit used, you’ve essentially reset it and the amount paid becomes available again minus interest and charges (as opposed to bank loans where the credit is non-revolving.)
How Do Credit Cards Work?
Your bank will typically give you a monthly billing cycle. This doesn’t necessarily run from the first of each month to the last but is based on your account open date.
At the end of each billing cycle, your bank will send you a credit card statement that shows how much you owe them. You can choose to pay the entire amount – this means you won’t have to pay any interest – or you can choose to pay the minimum amount or some amount in the middle. There is an interest-free grace period where you are not charged interest on your balance.
If you pay less than the full amount, interest is charged. which is a percentage of the amount you owe them. Credit card interest is usually calculated daily and charged monthly. Typically, a bank will charge 19.99% interest per month.
Credit card providers typically charge other fees including:
- An annual fee
- A fee when you make a payment in a foreign country or in a foreign currency
- A fee for paying your bill late
- A fee for using your card to advance cash, such as taking money out at an ATM.
A charge card is a special type of credit card that requires you to repay the entire balance in full each month. American Express is well known for its charge cards.
Issuers vs. Networks
You get a credit card either from a bank or other financial institution – the issuer. They are the ones who physically issue you the card, extend you a credit limit, set the terms and conditions of use, and deal with customer inquiries.
However, each bank doesn’t run their own credit card network – they all use one or more credit card networks. Some of the major credit card networks in use in Canada are MasterCard, Visa, and American Express. These companies handle the immense infrastructure required to support a worldwide credit card system.
Types of Credit Card
Unsecured Credit Cards
These credit cards are acquired through banks and financial groups. Because they are “unsecured,” you don’t have to put a security deposit or collateral And the application is easy if you have a favorable credit rating.
Unsecured credit cards vary in annual fees, interest rates, and rewards. Let’s look at the different types of unsecured credit cards:
Low-Interest Credit Cards
Also known as Low APR credit cards, these credit cards are great if you carry a balance each month. Their zero interest and low installment payment terms are also very useful when you need to make a large purchase.
Low-interest credit cards can have a single fixed rate annual percentage rate (APR) or a low APR that increases after a specific period. Because these credit cards have different terms, it’s best to read the terms and conditions of the introductory rate to avoid surprises such as accumulated interest.
No Fee Credit Cards
Getting a credit card with no annual fee will help you maximize earnings while minimizing costs. Just like any other unsecured credit card, a no-fee credit card helps you earn rewards such as hotel stays, merchandise, miles, and cashbacks.
Here’s the caveat: annual fees on credit cards can also mean higher rewards. However, if you’d rather save money than earn rewards, then you may want to check out credit cards with no annual fees.
Rewards Credit Cards
This type of credit card gives more rewards on credit purchases. There are three general types of rewards: travel, cashback, and points. Cashback credit cards are popular because they give cash rewards for each purchase. You can redeem these rewards for cash to buy goods.
On the other hand, general rewards credit cards give you points that you can use for plane tickets, gift cards, and merchandise. Some rewards cards are partnered with certain companies and brands. If you want to accumulate rewards for certain brands, then you might want to get a rewards credit card. Some examples are hotel rewards cards, gas cards with points or rebates, and retail rewards cards. If you are a frequent traveler, then you might want to apply for airline mile / frequent flier credit cards.
Rewards credit cards are recommended for individuals who regularly pay off their balances. This way, you can maximize the rewards by minimizing finance charges.
Balance Transfer Credit Cards
Ideal for people with already existing credit card debt, balance transfer credit cards have a low-interest rate and a lower introductory rate on balance transfers for a period of time. Apply for a balance transfer credit card if you want to save money from your high-interest-rate balance.
When comparing credit cards, look at the duration of the payment term and the interest rate. Ask yourself: How long can I pay my debt without interest? The longer the zero-interest payment period and the lower the rate, the better.
You may also want to compare the balance transfer fee of these credit cards. Most balance transfer cards have a “teaser” interest rate of 0% that can last for several months to a year. Always make sure to review the terms and conditions of each card before you apply.
Secured Credit Cards
A secured credit card is a good option for people who want to build their credit score or repair damaged credit. Unlike unsecured cards, this type of credit card requires a security deposit. The credit limit of each card depends on the amount of your deposit.
Secured credit cards have different annual fees and interest rates. If you want to rebuild your credit, go for secured cards from financial institutions that also offer unsecured credit cards. A consistent track record of on-time payments may earn you an upgrade to an unsecured card.
Business Credit Cards
Business credit cards help entrepreneurs separate their business and personal expenses while providing additional features and rewards ideal for business owners. For example, these cards give the flexibility on payments, rewards on typical office purchases, and airport lounge access. Some business credit cards also include free supplementary credit cards for employees. Other “business perks” include higher credit limits, expense management reports, and purchase protection policies.
U.S. Dollar Credit Cards
These credit cards are for Canadians who love to shop across the border - whether it’s buying online from US retailers or booking hotels out of the country. With a U.S. dollar credit card, you can spend money and pay bills in U.S. currency which eliminates discrepancies in exchange rates and conversion fees.
Tip: Consider applying for U.S. dollar credit cards if you regularly travel across the border, buy items from U.S. retailers and vendors, or have a U.S. dollar bank account.
Student Credit Cards
Getting a student credit card is your first step to building your credit history. The key is to look for a card with low-interest rates, no annual fees, and generous rewards. By faithfully paying off your balance each month, you can establish a good credit rating that will help you in your future application for a house or car loan.
However, remember that being in college does not automatically qualify you for a student credit card. You may need to show proof of income and good credit history to get approved. In this case, the best option is to get a secured credit card.
Comparing Credit Cards
There are literally hundreds of different credit cards on the market, all with different interest rates, terms, fees, and benefits. There’s no perfect card and choosing the best one for your needs comes down to your financial situation, credit history, needs, and requirements.
Your credit history will be a big factor in the type and number of credit cards banks will offer you. If you have good credit, then you’ll be offered cards with low-interest rates, high credit limits and additional perks such as the ability to collect air miles or discounts on hotels. If you have a poor credit rating, you will be considered more of a risk and, therefore, only get cards with higher interest rates and a lower credit limit.
Your age can factor into this too – if you are young, you won’t have built up much credit history. Consider a student credit card or a charge card to build up your credit rating. Only by using credit responsibly will your credit rating improve.
Your income will also play a big part in which credit cards are open to you – banks want to know that you’ll be able to repay the credit they are extending you. With a steady income flow coming into your bank account they can see that you have the means to repay your debts.
Apart from choosing the credit card with the lowest interest rate and fees for your situation, you might also want to consider the extra perks that come with some credit cards. Some offer cash-back when you spend in certain shops; others offer a points system that you can use to for example pay for travel with your credit card.
How to Apply for a Credit Card
Applying for a credit card is quite easy, whether you do it in person, at a bank, or online. The card issuer will need some documents from you to gauge whether you are a good fit for their credit card offers.
They will typically ask for pay stubs that show your income, bank statements, or an alternative proof of income. They will also ask for documents that prove your identity and residence, such as a government-issued ID and a utility bill in your name.
Every credit card will have different eligibility requirements. Some will require that you have a minimum annual income. Most require that you are 18 years old, while others 21.
After you have given the credit card issuer these details and documents, they will typically look over your application and approve/decline it. If approved, your credit card will be sent to your home address in 7 to 10 business days and you can begin spending once you activate it.
Which credit card is for me?
There are different types of credit cards in Canada. Finding the right one depends on your credit history, lifestyle, and income. Unsecured credit cards give rewards, secured cards help you build your credit history, and business credit cards have features that are helpful for entrepreneurs. We recommend comparing interest rates, payment terms, annual fees, and rewards to find the right credit card for you.
What are the different types of credit card rewards?
There are different rewards for different cards. The most common are cash back, travel points, store points, and free gas. Let’s have a look at each of them:
- Cashback rewards – Cash back rewards are rebates and typically range from 0.75% - 4.00% of your purchase. These rebates can be used as cash, and can be mailed to you as a cheque, transferred to your bank account, or applied to your statement.
- Travel points – These credit card rewards usually come in the form of air miles and can be used to purchase airplane tickets and free flights. Travel points are also used to redeem perks such as hotel stays and car rentals. Best for travelers, some credit cards also offer more points for travel purchases.
- Store points – Store credit cards are provided by select retailers such as Wal-Mart, Costco, Home Depot, Ikea, and HBC, to name a few. Points are earned from purchases, not necessarily from the same store, and can be used to redeem merchandise from their store.
- Free gas – Gas rewards credit cards allow you to earn points for purchases (up to 2x for gas purchases) that can be used at specific gas stations. These cards also give additional discounts on select gas and tire
- Other rewards – Some credit cards also include other rewards such as insurance products. They come at no added cost and bring value during unforeseen events.
How to choose the best credit cards rewards program
Before deciding to apply for your next credit card, consider your monthly spending and rewards preference.
- Think about your spending habits. Where do most of your credit card purchases go? Some credit cards offer 2x – 3x points for specific purchases like groceries, restaurants, gas, and travel.
- Consider the sign-bonus and terms. Some cards offer more bonus points, cash back and travel mileage as a sign-up bonus. Look into these terms and see how they fit in the long-term picture.
- Decide how you want to claim your reward. If want additional spending money each month, then a cash back rewards program would be the ideal choice. On the other hand, if you frequent grocery stores or gas stations, then credit cards linked to your favorite stores may give you better rewards.
Determine Your Eligibility for Credit Cards
Credit card lenders perform a credit check every time you submit an application. Credit checks from lenders and other third parties negatively impacts your credit score. For this reason, you should only apply for credit cards that you genuinely have a chance at getting approved for.
Some lending institutions provide minimum requirements for their borrowers that can be assessed before you apply. By considering minimum requirements, you will ensure that you don’t apply for a credit card that you will automatically get denied for. Below are some additional criteria to consider.
Sources of Income
Rewards and cash back cards tend to have minimum income requirements. Most banks consider the income of the applicant only, while others will consider the combined income of a household.
Your credit score plays a major role in all your personal finances and borrowing, including credit cards. Knowing your credit score can give you an idea of what types of credit cards you will be eligible for. If your credit score isn’t the greatest, you probably won’t get approved for the highest valued credit cards out there. Also, you can work on giving your credit score a boost before you apply to put your best foot forward with credit card issuers.
Residential Status and Age
In Canada, you must be a Canadian resident and the age of majority in your province to obtain a credit card. Usually this age is either 18 or 19, check your province’s age of majority if you’re unsure which age is applicable to you.
Complete Your Application
Now you have your sights set on a credit card that will work for you, it’s time to apply, finally! The quickest and easiest way to apply for a credit card is online, but you can also mail or fax your application, apply over the phone or visit the financial institution in person to complete your application. Keep in mind that applying using any method other than online will be much more time consuming.
Each application requires different information from the borrower, however, below is some basic information you can expect to submit with your application.
- Personal information, such as your name, address, email address and phone number
- Rent or mortgage payment amounts
- Occupation and current employer
- Annual income
- Spouse’s or total household income
- Social insurance number
Wait for Approval
You submitted your application, now it’s time to wait for approval. Approval can take a couple minutes if done online, unless the credit card provider needs more information from you. If additional information is needed, it can hold up the process for several days. If you applied using another method other than the internet, the process can take several days or weeks.
What to Do When You’re Declined
If you weren’t approved for a credit card, figure out why so you don’t make the same mistake again. Below are some common reasons for credit card non-approval. If none of the below are the reason you got declined, reach out to the lender to find out why.
- Do not meet the credit card’s minimum income requirements
- Information on your credit card application does not match your credit report
- You aren’t a Canadian resident or the age of majority
- Your credit score is too low to qualify for the credit card
Being declined for a credit card, or anything for that matter, is never fun, but it also isn’t the end of the world. Perhaps you applied for a credit card that was slightly out of your reach for your current financial position, and that’s okay! The important thing is that you learn from your financial mistakes. When you apply for another credit card, consider the reason you got declined and work on your personal finances to get approved the next time around.
Tips to Avoid Credit Card Debt
Have an emergency fund
Most people use their credit cards when an emergency arises (e.g. for paying medical bills or after a car breaks down). Setting aside a fund for emergencies which is typically 3 months’ worth of your overall expenses will help you not rely on your credit card during unforeseen circumstances.
Buy only things you can afford
Treat your credit card as cash and only swipe it on stuff you can afford.
Pay your balance in full and on time every time
Once you miss a payment, not only will you have to make up for the missed payment, but you will also have to pay the late fee and interest rate. This not only puts a strain on your budget, but it also puts you at risk of using your credit card again to make ends meet.
Understand your credit card terms
It is recommended that you read through your credit card agreement. Make sure you understand the interest rates, fees, billing dates.
Keep away from unnecessary balance transfers
Balance transfers can increase your balance because providers charge a balance transfer fee. As much as possible, use balance transfers only if you have a good reason to so, such as to take advantage of a lower interest rate. If you really need to transfer your balance from one card to another, use our Credit card comparison tool to help find the best balance transfer credit card based on your needs.
Avoid cash advances
Cash advances are one of the most expensive forms of credit card debt. They have high interest rates on top of the cash advance fees. It is advised to Use them as a last resort. Most importantly, avoid cash advances by making sure to set a budget and to have an emergency fund.
Never let anyone borrow your credit card
As mentioned previously, treat your card like you would with cash and never lend it to anyone else. Even if that person promises to pay your credit card bill, you are the one responsible for any charges on your credit card. This means that if he or she refuses to pay on time, you will ultimately have to pay the balance (and interest).
Limit the number of credit cards you own
The more cards you have, the more you are at risk of debt. Most people keep up to 3 credit cards with them.
Know the signs of credit card debt
Learn to recognize early warning signs such as being unable to pay your balance in full. Once your see the signs, you can follow our tips on how to reduce your debt below.