How to choose a credit card
Using credit cards can help you build your credit history. Before you choose one, make sure you know the fees and what you’re paying for.
On this page we answer
- Why use a credit card?
- What is an example of how interest can add up?
- What are the main types of credit cards and their features?
- What are other kinds of credit cards?
- What to ask yourself when choosing a credit card
- What should you consider when selecting a credit card?
Why use a credit card?
Many Canadians use both debit cards and credit cards. Debit cards allow you to draw directly from your bank accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition when making a purchase. Credit cards temporarily lend you the money to make that purchase.
The main difference is that with a debit card, you pay for what you buy right away. When you use a credit card, you pay the bill later. When you use your credit card, you will be charged interest on the purchase until you pay the bill — unless you pay the bill during the interest-free grace period. Because of the credit card interest, you could end up paying more for the item than the original price.
What is an example of how interest can add up?
The longer you wait to pay your credit card bill in full, the more interest you’ll pay. You’re required to make a minimum payment each month if you can’t pay the full amount. This is usually either a flat amount such as $10, or a percentage of the balance you owe.
For example, imagine you have a $200 balance and paid $10 minimum per month. With an annual 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 of 20%, by the time you paid it off, you would owe $239.57.
Making 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 amounts will ensure that you keep up your payments, which helps your credit history. However, it’s better to put in more than the minimum if you can.
Compound interest collects on credit card debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition until it’s paid. Use our calculator to find out how long it will take you to pay off a credit card or other debt amount.
What are the main types of credit cards and their features?
Credit cards are usually issued by financial institutions. There are many types of credit cards to choose from, depending on fees, interest and rewards. Before you start shopping for a card, it’s important to understand the different optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition.
There are four main types of cards that let you make purchases using credit. They charge you interest on the amount you owe if you haven’t paid off your bill.
|Type of credit card||Key features|
What are other kinds of credit cards?
There are two types of cards which work a little differently than typical credit cards:
- Prepaid credit cards
- Secured credit cards
Prepaid credit cards
With prepaid credit cards, you put your cash into the card — this is called loading it. You can then use it like any other credit card. You don’t have to pay back what you spend, because you’re paying for your purchases with your own money.
You can use the card to pay bills, shop at stores or shop online. When the card runs out of money, you can no longer use it. You can usually reload the card by going back to the financial institution you got it from. Or, you may be able to go online and transfer more funds to the card using your bank account or another credit card. You may also be able to reload your card over the phone.
Be sure to read the rules and fees associated with a prepaid card before purchasing it. This includes understanding possible fees for activation, usage, maintenance and reloading.
If your prepaid card is lost or stolen, be sure to report it. Other credit cards may protect you if your card is used without your knowledge. But you don’t have that same protection with a prepaid card.
Secured credit cards
When you use a secured credit card, you deposit funds with a lender to back up – or “secure” – the card. Depending on the lender, you may not be able to deposit more than $5,000. Like pre-paid cards, you aren’t borrowing the money for purchases. You’re spending cash you already have.
Secured credit cards typically have higher fees and interest rates than standard credit cards. And you can only spend the amount of money you have deposited. Unlike a prepaid card, you must pay back what you spend. You can get your original deposit back when you close your card, provided you have paid off the balance in full and on time.
A secured credit card may be useful for someone who wishes to build or rebuild their credit history. That’s because the lender may report your payment history each month to the credit bureaus. If you make regular payments, your credit history can improve.
What to ask yourself when choosing a credit card
Choosing a credit card depends on how you plan to use it and what matters to you. Consider the following questions when selecting a credit card:
1. Will you pay the balance in full each month? If so, interest rates may not be the most important factor.
2. Are you likely to carry a balance and owe interest each month? In this case, low interest rates may be important.
3. Is collecting points for travel or cash-back reward important to you? If so, consider what’s you biggest priority: earning points, cash-back, rewards for gas, etc.
What should you consider when selecting a credit card?
When selecting your card, check the fine print for details on the card fees, the grace period, and any additional features covered by the card.
Most credit cards charge a fee. Make sure you know the interest rate you’ll pay on any unpaid balance after the grace period. Also find out about any fees you’ll pay for the card and when they apply. The most common types of fees include annual fees, late fees and over-the-limit fees. You may also be charged fees for having additional cards and for cash advances.
The grace period is the time you have to pay off the balance you owe each month before you will have to pay interest. In most cases, the grace period starts on the billing date and ends a certain number of days after.
Many cards offer extra features such as insurance for situations such as travel accident or medical coverage, flight delay or loss of baggage, trip cancellation, purchase protection or extended warranty.
To be eligible, you must use your credit card to pay for your travel or merchandise. Other conditions might also apply. Read your credit card agreement or check with the provider to understand when you are covered by this insurance and how to claim it.
Credit cards can be useful. Like anything involving your money, it’s important to understand how they work. Remember to:
- Choose your credit card carefully based on your needs.
- Compare the different credit card features based on how you plan to use it. If you’re not using the features, it may not be worth paying the annual fee or interest rate.
- Pay your card off each month to avoid interest charges.
- Keep the interest rate in mind when making transactions. Most credit cards charge a different rate for purchases, balance transfers and cash advances.
- Use your credit card responsibly and keep up with payments to help build your credit history.