How credit cards work

When you sign up for a credit card, you agree to certain charges, terms and conditions. There are also rules about what credit card companies can and can’t do, and about the information they must include on your monthly statement.

8 things to know about your credit card

  1. Annual fee – If your credit card charges an annual fee, ask the lender if they’ll waive it. They may be willing to do this to keep your business.
  2. Balance due – Your statement will tell you what you owe and when it’s due. The amount due can include any unpaid balance you owe from a previous bill, as well as any new charges, interest, late fees or annual fees.
  3. Credit limit – This is the amount you can borrow using your card. The lender can’t change this limit without letting you know.
  4. Finance charges – If you don’t pay your bill on time, these charges can include late fees plus interest. You’ll likely pay a higher rate of interest on any cash you borrow using your card and a lower rate on money you borrow for purchases. Your credit card company treats these as 2 different kinds of balances.
  5. Grace period – This is the time you have to pay off the balance you owe each month before you have to pay interest. In most cases, the grace period starts on the billing date and ends a certain number of days after. Under Canadian rules, if you pay off your balance in full each month, your lenderLender Any person or organization that lends money.+ read full definition must give you a grace period of at least 21 days on all new purchases. If you don’t, you’ll pay interest on the full amount you owe.
  6. Annual percentage rate (APR)Annual percentage rate (APR) The total costs of a loan or other debt each year. It is stated as a percentage (for example, 5%). Use it to compare your borrowing options (for example on a mortgage or credit card)+ read full definition This includes all loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition service costs and interest. It may be higher than the interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition you see in the loan contractContract A binding written or verbal agreement that can be enforced by law.+ read full definition.
  7. Introductory rate – This is a special offer that gives you a temporary, lower APR. In most cases, the offer lasts about 6 months. Then it goes up to the normal rate for your type of card. Your lender must tell you in advance when interest rates are going to increase.
  8. Minimum monthly payment – Most cards ask only for a minimum paymentMinimum payment The minimum amount that you must pay, usually monthly, on a loan or line of credit. In some cases, the minimum payment may be “interest only.” In other cases, the minimum payment may include principal and interest.+ read full definition each month. This is often 5% of the current balance or $10, whichever is more. Your monthly statement will tell you how long it will take to fully repay what you owe if you only make the minimum payment each month.

 Making the minimum payment

It can take several years to pay off your credit card by making the minimum monthly payment. For example, say you owe $4,000 on your credit cards. The interest rate is 18%. If your minimum monthly payment is $200 – or 5% – it will take you about 2 years to get out of debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition. And you’ll end up spending $800 in interest. Use this calculator to find out how long it will take you to pay off your debt.

Key point

There’s no grace period for cash advances. To regain your grace period, pay off everything you owe by the next due date.


You’ll pay a lot of interest if you make only the minimum monthly payment on your card. And the item you bought with your card will cost you a lot more in the long run.

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