How Do Credit Cards Work in Canada?

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

While there’s no denying the convenience factor of credit cards, if you don’t use them responsibly, you could end up in debt.

Understanding how credit cards work and what options are available to you will help you take control of your finances.

How credit cards work

Credit cards are pieces of plastic or metal issued by financial institutions to approved consumers looking for a line of credit. Your credit card is assigned a credit limit, which is the maximum amount of money you can use to pay for goods or services. You’re essentially borrowing funds that will need to be paid back at a later date.

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

Credit card providers will also report your credit history to one of the two credit bureaus: Equifax and TransUnion. If you make your payments on time, you can improve or maintain your credit score. Missing payments or maxing out your credit cards — spending all the way up to your credit limit — can negatively affect your credit score. Having a lower credit score might affect your ability to access additional credit, such as a car loan or mortgage, in the future.

How credit card payments work

You’ll receive your credit card statement at the end of each billing cycle, which typically lasts a month. Your statement will include a list of any transactions you made that month and how much money you owe as a result.

When your bill arrives, you can choose to pay the full balance, the minimum payment, or an amount in between. If you opt for the minimum payment or even a partial payment, you’ll incur interest charges. These extra fees can add up quickly and will increase the overall cost of your purchases.

How credit card interest works

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

Some credit card companies offer an interest-free grace period for purchases. These grace periods typically last 21 days. Grace periods begin on the last day of your monthly billing cycle. If you pay your balance in full before the next billing due date, you won’t owe any interest.

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4 credit card fees to watch out for

Every credit card comes with some kind of cost or fee, but they’re not always easy to spot. Here’s what to look out for:

1. Annual fees

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

2. Interest charges

Every credit card has an interest rate for purchases and cash advances, and the rates for these two types of transactions may differ. Make sure you know these rates before you apply for a card.

3. Balance transfer fees

Some credit cards that offer balance transfers charge fees. In most cases, these fees are around 1% to 3%.

4. Foreign transaction fee

Many credit cards in Canada charge a foreign transaction fee of 2.5% on any purchase that’s not made in Canadian dollars.

Credit card versus debit card

A debit card lets you make purchases with the funds available in your chequing account. You don’t pay interest on your purchases and your credit history isn’t impacted by what you spend.

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

Types of credit cards

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

Rewards credit cards

If you have a good credit score (generally thought of as 660 and above), rewards credit cards may be appealing as you’ll get something back for every purchase you make. However, make sure the rewards you earn outweigh any costs you pay for the card, like an annual fee. Generally speaking, there are four kinds of rewards cards to consider:

Cash back cards

Cash back credit cards pay you back a fixed percentage of what you spend. Pay close attention to the payout details, as you could receive rewards monthly, yearly, or when you’ve earned a minimum amount of cash back.

Airline or hotel cards

Airline and hotel credit cards are good for people who like to travel and participate in certain loyalty programs. The points you earn may be used for free flights or nights at hotels.

General travel cards

Instead of being loyal to one specific brand, you can get a general travel credit card. Although these rewards points are more flexible, they may not be as valuable in terms of redemption value as those from airline or hotel cards.

Store credit cards

Many stores have their own credit cards that allow you to earn points from the retailer’s rewards program. These cards can be appealing, but the benefits have a limited scope. Make sure it is a good fit for your shopping habits before applying.

Low-interest credit cards

As the name implies, low-interest credit cards have low interest rates, often in the range of 9% to 13%. Their rates can be significantly lower than the typical credit card interest rate of 20%, which can be an advantage if you carry a balance on your credit card. Some low-interest credit cards offer a balance transfer option with a promotional rate. This type of promotion allows you to move your debt from an existing credit card to your new one at a lower interest rate for a fixed period.

Credit cards for no/bad credit

If you don’t have a credit history or you’ve made mistakes that have lowered your credit score, you may not qualify for a traditional credit card. That doesn’t mean you won’t have access to credit cards; you’ll just be limited to the following choices:

Secured cards

To qualify for a secured credit card, you’ll deposit security funds. The amount you deposit usually determines your credit limit. As you make purchases and pay off your balance, your history will be reported to one of the credit bureaus, and eventually, you may qualify for an unsecured credit card.

Prepaid cards

A great option for people who want to limit their spending, prepaid cards only give you access to funds that you’ve already put on the card. Only a few prepaid credit cards report to the credit bureaus, though, so choose wisely if you hope to build your credit.

How to compare credit cards

The right credit card for you will depend on your spending habits and lifestyle. When selecting a card, consider the following:

Annual fee. Cards with higher annual fees may offer more enticing perks, but the annual cost may not be worth it, depending on how you use your card.
Interest rate. If you tend to carry a balance on your credit card, seek one with a lower interest rate.
Rewards program. Rewards points and programs come in all shapes and forms. Look for a card with rewards that will incentivize you to make the most of the program.
Balance transfer rate. If you intend to transfer an existing credit card balance to your new card, see if you can snag a 0% balance transfer offer. Some cards charge 0% interest for an introductory period when you transfer an existing balance.
Eligibility criteria. Before you submit an application, review any minimum credit scores, annual income or annual spending criteria.

Credit card benefits and risks

Benefits

Credit building. Credit cards can help you build a better credit score, which is vital for many situations in which you need to borrow money.
Sign-up bonuses. Many cards offer a generous bonus when you’re approved, such as increased cash back or additional rewards points.
Additional benefits. Depending on the card, you might get other perks such as travel insurance, extended warranty coverage, lounge access, and more.
Flexibility. Credit cards can help you manage your monthly budget or even save you from a financial emergency — as long as you use them responsibly.

Risks

Increasing your debt. Borrowing money to make purchases can be a slippery slope — especially if you don’t pay off the entire balance of your credit card on a regular basis. Carrying a balance means you’ll accumulate interest charges on what you owe, increasing the amount you need to repay in the long run.
Harming your credit score. Missing a credit card payment can hurt your credit score. This, in turn, can affect your ability to apply for future loans and may impact the interest rate you may be offered as a result.

A credit card is just one of the tools you’ll use on your financial journey through life. If you always pay off your balance in full, you can reap the benefits without paying extra costs.

However, if you overspend or fall behind on your monthly payments, you could quickly find yourself in a debt trap. Be smart about your money and use your credit cards responsibly.

Yes. You can avoid paying credit card interest by paying off your balance in full each month.

When you request a credit card refund, the merchant that conducted the transaction will reverse the charge and the refunded amount is posted to your credit card. Refunds typically take three to five days to process.

About the Authors

Barry Choi

Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel.

Shannon Terrell

Shannon Terrell is a lead writer and spokesperson for NerdWallet, where she writes about a variety of personal finance topics. Previously, she was a writer, editor and video host for financial comparison company, Finder. Shannon has appeared as a financial expert on CP24 and has been quoted in numerous publications, including Bloomberg, Global News, Yahoo! Finance and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga. She’s also a published author whose work has been featured in academic journals from the University of Toronto. Shannon is based in Brampton, Ontario.

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