Choosing a credit card

From Financial Consumer Agency of Canada

A credit card is a card that lends you a limited amount of money to pay for goods and services. You must pay the money back by a certain date.

The key differences between credit cards are:

  • the interest rates
  • the fees
  • the rewards and benefits

Compare credit card interest rates

A credit card’s interest rate may be an important factor if you regularly carry a balance. A balance is the amount of money you owe on your credit card. The higher the interest rate, the more interest you will pay on an outstanding balance. A lower interest rate card may save you money over time.

The interest rate may not be an important factor in choosing a credit card if you:

  • pay your balance in full every month
  • don’t take out cash advances or make cash-like transactions

There are many credit cards with low interest rates available. Some low rate cards charge an annual fee. Even if there is a fee, a low rate card may be a better option.

Example: Compare low interest rate cards and standard cards

Suppose you regularly carry a balance on your credit card. Your current credit card has an interest rate of 21% with no annual fee. You want to pay off your balance in one year and are considering switching to a low interest rate card with a 9% interest rate and a $50 annual fee.

Table 1: Compare the total cost of your current credit card with a low-rate card over a one year period
Type of credit card Balance
owing
Interest
rate
Annual
fee
Interest
paid
Total cost to pay off balance
(including annual fee)
Current card $4,000 21% $0 $472 $4,472
Low interest rate card $4,000 9% $50 $199 $4,249

In this example, you'll pay $273 less in interest with the low interest rate card. This is even with the $50 annual fee. Keep in mind that this example assumes you don't use your credit card while you paid down your balance.

Credit card introductory offers with low interest rates

Some credit cards feature low interest rates for a limited time. This is to encourage you to apply for a card or to transfer your current balance to the new card to benefit from the lower interest rate.

Generally, the low interest rate will apply for a limited time only. Typically it applies for 6 to 12 months. The rate will usually increase once the introductory period ends.

In some cases, the introductory rate ends if you go over your credit limit or make a late payment.

Credit card issuers that are federally regulated financial institutions must give you the following key details:

  • when the low interest rate ends
  • the types of transactions the introductory rate covers because different interest rates may apply to different types of transactions including purchases, cash advances or balance transfers
  • if other fees or conditions apply
  • what standard interest rate you’ll pay after the low interest rate period ends

Before you sign up for an introductory low-rate or interest-free credit card, read the application or credit agreement carefully.

Compare credit card rewards and benefits

A rewards card allows you to earn discounts on products and services or get cash back when you use the card to purchase goods and services. Credit cards may also come with benefits such as travel insurance or car rental insurance. You may have to pay an annual fee.

Before you choose a credit card for its rewards program or benefits, consider the following:

  • if you carry a monthly balance, the interest you’ll pay may reduce the value of the card’s rewards or benefits
  • the card’s annual fee may be more than the value you earn with points or miles
  • how often you expect to use the card’s benefits such as insurance for rental cars

Compare the rewards and benefits offered by different cards.

Think about:

  • how likely you are to use each benefit
  • how long it will take you to earn rewards
  • if you already have access to the benefit some other way
  • if there are any restrictions or limitations that might reduce the value of the rewards and benefits

Read the terms and conditions of the credit card application and agreement carefully. Ask questions about anything you don't understand.

Examples: Estimating the value of rewards and benefits

To help you figure out if a card’s rewards program is worthwhile, estimate the potential value of the rewards you may earn in a year and then subtract the annual fee.

These examples are for illustrative purposes only. The examples assume you pay your balance in full each month and don’t use your card for cash advances or cash-like transactions.

Example 1: Grocery rewards

Your credit card has a $25 annual fee. For every dollar you spend, you earn 10 points at the grocery store. Every 10,000 points gets you $10 off your grocery bill.

In a year, you make $4,000 worth of purchases with your credit card you would earn $40 worth of rewards.

The rewards are worth $40, but after you factor in the annual fee of $25, your total benefit is $15.

Example 2: Cash back rewards

Your credit card has an $85 annual fee. You get 1% cash back on purchases.

In a year, you make $4,800 worth of purchases using your credit card. At the end of the year, you receive $48 back.

Because the $85 annual fee is higher than the $48 reward benefit you receive, this credit card isn’t worth it.

Example 3: Car rental insurance

Your credit card has a $110 annual fee. Your credit card offers car rental insurance for up to seven days each year.

You rent a car for seven days. The rental agency charges $20 a day for car insurance. Without your credit card coverage, you would pay $140 for car rental insurance.

If you compare the $110 annual fee to the amount it would cost you to insure a rental car for seven days, you save $30 with this reward. If you rent a car every year, this rewards card would be worthwhile.

Compare credit card fees

When you use a credit card you may have to pay fees for services such as taking out a cash advance or using your card in foreign countries. Different credit cards have different fees.

Credit card issuers that are federally regulated financial institutions must:

  • advise you before they increase fees or introduce new fees
  • include the credit card fees they charge in their credit card applications
  • give you key details such as interest rates, fees and other charges in an information box when you apply for a credit card

Read the terms and conditions of the credit card application and agreement carefully. Ask questions about anything you don't understand.

Annual fees

Some financial institutions charge an annual fee for certain cards. Usually, the charge will appear on your credit card statement once per year. Cards with an annual fee usually offer extra rewards and benefits or a lower interest rate.

You may have to pay an additional annual fee if you request a card for an additional cardholder. The fee for the second card is typically lower than it is for the first card.

Keep in mind that there are credit cards available that don't charge an annual fee. Some no-fee credit cards offer similar rewards and benefits to cards that do have an annual fee.

Before you apply for a credit card with an annual fee, consider how you'll use the card. Think about whether the rewards and benefits are worth the annual fee. Also consider if there is a similar card available that does not have an annual fee.

Other fees

You may also have to pay fees such as:

  • cash advance fees
  • foreign currency charges
  • over-the-limit fees
  • reprinting charges for statements or receipts from previous transactions
  • dishonoured payment fees
  • inactive account fees

Learn how you’ll pay the applicable fees when using your credit card.

Specialized credit cards

Depending on your credit history and spending habits, a specialized credit card may suit your needs.

Student credit cards

Some credit cards are made specifically for students. These cards generally have lower credit limits than standard credit cards. They may have benefits specifically tailored to students, such as discounts at certain retailers. Low interest rate student credit cards are also available.

U.S. dollar credit cards

A U.S. dollar credit card may work for you if you often purchase goods or services in U.S. dollars. With this type of credit card, you may avoid having to pay foreign currency conversion rates since you are paying in U.S. dollars.

Retail credit cards

A retail credit card is credit card that lets you earn rewards, such as discounts, at a specific retailer. Retailers often offer extended interest-free periods, discounts or reward programs with in-store credit cards. Keep in mind that these offerings often apply only to purchases made at the store that issued the card.

If you shop at one store enough, you may benefit from its rewards programs. Be sure to consider the potential benefits against any interest or fees you may pay. For example, if you have not paid the balance in full when the interest-free period ends, you will have to pay interest from the date of purchase. If this is the case, since the interest rate for retail cards is usually high, even the items you bought at a discount may end up costing you more than the regular price.

Secured credit cards

Be careful when applying for a secured card from an unknown financial institution.

In particular, beware of secured card offers from issuers outside Canada. If you have problems with the company’s services, it may be more difficult to resolve them.

A secured credit card requires that you provide a security deposit to the financial institution that issues the credit card.

Your credit limit is normally set as a percentage that is equal to or higher than your deposit. Depending on the credit limit you request, the security deposit may range from a few hundred to a few thousand dollars.

If you don't make your payments, the financial institution may use your deposit to pay the money you owe.

You may want to consider a secured credit card if you:

  • are a newcomer to Canada and have no credit history
  • have filed for bankruptcy in the past
  • want to rebuild your credit score after past credit problems

To build your credit history or improve your credit score, make all your payments on time.

Secured cards without a recognized brand name such as VISA, MasterCard or American Express may have limited uses. Only a small number of stores may accept such cards. Or, you may be limited to making purchases from a specific location.

Getting a secured credit card

To get a secured credit card, you may have to pay a one-time application or set-up fee. This fee is not part of your security deposit. You may not get it back if your application is turned down. Your card may have an annual fee.

Check with your financial institution to make sure your deposit is insured. Your financial institution usually holds your security deposit. It may also make arrangements with another financial institution to hold the deposit.

Make sure you understand all the terms and conditions associated with a secured card before you accept it.

Cancelling your secured credit card

To cancel a secured credit card you need pay off the entire balance. You'll get your security deposit back when you close your account.

Applying for a credit card

Before you complete a credit card application, make sure you understand all of the terms and conditions that apply to the card.

If you apply for a credit card from a federally regulated financial institution such as a bank, the application must include an information box. The information box must present key features of the credit card such as interest rates, fees and other charges in a clear and easy-to-understand way.

Learn more about your rights and responsibilities when applying for a credit card.

Check your credit report before applying for a credit card

Check your credit report with Canada’s credit bureaus, TransUnion and Equifax.

If your credit report contains an error, take action to correct it immediately. Errors in your credit report may be the reason you couldn’t get an unsecured credit card.

Learn how to order your credit report.

Find out how to check for errors on your credit report and how to correct them.

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