Credit Cards 101: The Basics

A credit card is a payment card that allows you to borrow money from a bank (the card issuer) to make purchases. Unlike a debit card, which pulls money directly from your bank account, a credit card creates a loan that you must repay.

How it works: 1. You make a purchase using the card 2. The bank pays the merchant on your behalf 3. The purchase is added to your card balance 4. You receive a monthly statement showing what you owe 5. You repay the balance (in full or partially)

Key benefit: When used responsibly, credit cards help you build a credit history, which is essential for getting mortgages, car loans, and even some jobs in Canada.

Your credit limit is the maximum amount you can borrow on your card. It's set by the card issuer based on your income, credit history, and other factors.

Example: If you have a $5,000 credit limit and spend $2,000, you have $3,000 of available credit remaining.

Credit utilization: This is the percentage of your limit you're using. Keeping it under 30% is good for your credit score. - $1,500 balance on $5,000 limit = 30% utilization ✓ - $4,000 balance on $5,000 limit = 80% utilization ✗

Can you increase your limit? Yes! After 6-12 months of responsible use, you can request a credit limit increase. This can help your credit score by lowering your utilization ratio.

APR (Annual Percentage Rate) is the interest charged on balances you carry past the due date.

Typical Canadian credit card APRs: - Standard cards: 19.99% - 21.99% - Premium cards: 20.99% - 22.99% - Low-interest cards: 8.99% - 13.99% - Cash advances: 22.99% - 27.99% (always higher)

How interest is calculated: Interest is charged daily on your balance. With a 20% APR: - Daily rate = 20% ÷ 365 = 0.055% per day - $1,000 balance = $0.55 per day = ~$17/month in interest

The golden rule: Pay your full balance by the due date to avoid interest entirely. This is called using the grace period.

The grace period is the time between your statement date and payment due date—typically 21 days in Canada. During this time, you won't be charged interest on new purchases (if you paid last month's balance in full).

How it works: 1. Statement closes on January 15 with $1,000 balance 2. Payment due date is February 5 (21 days later) 3. Pay $1,000 in full by February 5 = no interest charged 4. Pay only $500 = interest charged on remaining $500

Important: The grace period only applies to purchases. Cash advances start accruing interest immediately with no grace period.

The minimum payment is the smallest amount you must pay to keep your account in good standing—typically 2-3% of your balance or $10, whichever is greater.

Why minimum payments are dangerous:

Example with $5,000 balance at 20% APR: - Minimum payment: ~$100/month - Time to pay off: 9+ years - Total interest paid: $6,000+

If you paid $250/month instead: - Time to pay off: 2 years - Total interest paid: ~$1,100

The rule: Always pay more than the minimum. Ideally, pay the full balance every month.

Your monthly credit card statement contains important information:

Key sections: - Statement balance: Total owed from last billing cycle - Minimum payment: Least you can pay to stay current - Payment due date: When payment must arrive - Credit limit: Maximum borrowing amount - Available credit: How much you can still spend - Transactions: List of all purchases and payments - Interest charges: Any interest added this month - Rewards earned: Points or cash back accumulated

Pro tip: Set up automatic payments for at least the minimum to never miss a payment. Better yet, auto-pay the full balance.

Not all credit card transactions are treated equally:

Purchases - Standard transactions for goods and services - Grace period applies (no interest if paid in full) - Earn rewards on these

Cash Advances - Withdrawing cash from ATM or getting cash-like items - NO grace period—interest starts immediately - Higher APR than purchases (often 22-28%) - Usually have fees (3-5% of amount) - Includes: ATM withdrawals, casino chips, money orders, cryptocurrency

Balance Transfers - Moving debt from one card to another - Often promotional 0% APR for 6-12 months - Transfer fee applies (usually 1-3%) - Good for paying down debt faster

Beyond interest, credit cards can charge various fees:

Annual Fee: $0-$600+ - Charged yearly for card membership - Often waived first year - Premium cards have higher fees but better perks

Foreign Transaction Fee: 2.5% - Charged on purchases in foreign currencies - Some cards waive this fee entirely

Cash Advance Fee: 3-5% - Charged when withdrawing cash - Plus higher interest rate

Late Payment Fee: $25-$30 - Charged if you miss the due date - Also hurts your credit score

Over-limit Fee: $25-$30 - Charged if you exceed your credit limit - Many cards no longer charge this