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How credit cards work

From: Financial Consumer Agency of Canada

A credit card allows you to pay for goods and services in stores, online and by telephone. Your credit limit is the maximum total amount you can spend. As you pay down your balance, you have access to more credit. This is called revolving credit.

Types of credit card transactions and associated fees

You may use your credit card for different types of transactions.

Credit card purchases

You may use your credit card to pay for goods and services:

It’s a good idea to keep receipts for all your credit card purchases. Check your receipts against your credit card statement to make sure there are no mistakes. If you find a mistake, contact the merchant to correct the transaction. A merchant is the business that sold you goods or services. If the merchant doesn’t correct the transaction, contact your financial institution for assistance.

Find out how to resolve an unauthorized transaction.

You might be able to turn your qualifying purchases into buy now, pay later plans. Credit card providers typically call this option equal instalment payments or instalment plan. Make sure you understand the pros and cons of these types of plans.

Find out more about buy now pay later plans.

Merchant surcharges and discounts

Merchants may add a surcharge to your transaction for using your credit card (except in Quebec). Your purchase may cost you up to 2.4% more.

They must inform you of the surcharge before processing your payment. This allows you to cancel your purchase before authorizing payment or pay with an alternative form of payment.

Merchants must also clearly disclose the surcharge:

To avoid surcharges you may:

Cash advances

You may use a credit card to get a cash advance by:

There is no interest-free grace period with cash advances. You'll pay interest from the date you get a cash advance until you pay it back in full. The interest rate for cash advances is usually higher than for regular purchases. For example, the interest rate for regular purchases may be 19%, but it may be 22% for cash advances.

A cash advance may be a very expensive way to borrow money. Before you take out a cash advance, consider a cheaper way to borrow. Consider a personal loan or line of credit. When you use cash advances, try to pay off as much of your balance as early as possible.

Cash advance fees

You may also have to pay a fee each time you get a cash advance.

The fee may be:

Some financial institutions set a minimum and a maximum amount for those fees.

Cash-like transactions

Financial institutions often treat the following types of transactions like cash advances:

Like a cash advance, you’ll pay interest from the date you make the cash-like transaction. The interest for a cash-like transaction is usually higher than for regular purchases. You may also have to pay a fee each time you make a cash-like transaction.

Check your credit agreement or contact your financial institution to find out if they consider your purchase as a cash-like transaction.

Credit card cheques

You may use credit card cheques, also called convenience cheques or promotional cheques, to make purchases the same way you would with personal cheques. You may also use them to pay bills or other debts such as outstanding balances on other credit cards.

You’ll pay interest from the date you use the cheque. The interest rate charged when you use a credit card cheque is usually higher than for regular purchases.

Financial institutions link credit card cheques to your credit card account. If you use them to pay for goods or services, the amount will appear on your credit card statement.

If you don’t want to use credit card cheques, cut them up before throwing them out. It will help avoid fraud. Contact your credit card issuer and ask them to stop sending credit card cheques.

Learn more about your rights when using credit card cheques.

Balance transfers

A balance transfer is when you move your balance from an old credit card to a new one. That new card generally has a lower rate which helps you save money in interest payment.

You’ll usually have to pay a fee to transfer a balance from one card to another. A balance transfer fee is usually a percentage of the amount that you transfer.

Suppose you transfer a $1,000 balance to a different credit card with a balance transfer fee of 3%. The balance transfer fee would be $30. Keep in mind that you’ll still need to pay interest on the balance transfer.

Before you transfer a balance, be sure to read the terms of your credit card agreement carefully. Usually, the promotion will only apply for a specific period. Ask your financial institution about anything you don't understand.

Credit limit

Your credit limit is the maximum amount you may spend on your credit card. Credit card issuers set your limit when you first get your credit card. You may ask them to reduce or increase it.

Your credit card issuer must get your permission in writing or verbally before increasing your credit limit. When you do so, you give your express consent. If you give your express consent, your credit card issuer must confirm the change in writing. They must do so no later than your next credit card statement.

Learn more about giving express consent for financial products and services.

Over-the-limit fees

It’s your responsibility to monitor your balance and stay within your limit. If you go over your limit, you may have to pay an over-the-limit fee.

Federally regulated financial institutions can’t charge over-the-limit fees in certain situations. For example, if a merchant puts a temporary hold on your credit card that goes over the credit limit.

Suppose you have $90 left until you reach your credit limit. You buy gas with your credit card. The gas retailer places a $100 temporary hold on your card until you finish filling up. It costs you $20 to fill up. In this case, the financial institution can’t charge an over-the-limit fee.

If you’re often close to your credit card limit, ask your financial institution to increase your credit card limit. You may also ask your financial institution to stop any transactions that will go over the limit. Certain low-value transactions may still go through. Not all financial institutions offer this service.

Read the terms of your credit card agreement to see if transactions over your limit will go through. See if there are any fees if they do. Ask your financial institution about anything you don’t understand.

Getting electronic alerts from your financial institution

Your financial institution may send you an electronic alert when the credit available on your credit card falls below a certain amount.

These alerts may help you manage your day-to-day finances and avoid fees.

Learn more about these electronic alerts.

How interest is applied to your credit card

You’ll pay interest if you don’t pay your credit card balance in full by the due date. You’ll continue to pay interest until you pay your balance back in full.

Interest rates vary depending on your financial institution and the type of transaction. For example, you may pay 19% interest on regular purchases and 22% on cash advances or cash-like transactions. Rates for specialized and retail credit cards may be higher.

Federally regulated credit card issuers may choose how they apply your payments to your balance.

Learn how payments are applied to your balance.

Your credit card statement and your credit card agreement must clearly indicate the interest rates you must pay.

Learn more about your rights when getting a credit card.

Interest-free grace periods

Credit card issuers give a grace period to pay for your previous month’s purchases without interest. The grace period begins on the last day of your billing period. You may find your billing period on your credit card statement. The grace period doesn’t apply to cash advances, cash-like transactions and balance transfers.

Federally regulated financial institutions must provide a minimum 21-day grace period.

For example, suppose you buy a smartphone using your credit card on January 15. On February 1, you get your January credit card statement which includes the smartphone purchase. A 21-day interest-free grace period will apply to purchases made in January. You have until February 21 to pay off the smartphone and your other purchases to avoid interest charges.

Increases in interest rates

If you don’t make your required minimum monthly payments by the due date, your interest rate may increase. Interest rate increases may be different depending on your type of credit card and your credit card issuer. The increase may be temporary or permanent.

If you miss a payment, you may lose your promotional interest rate. It may also increase your interest rate. Check with your credit card issuer how much your interest rate will increase. You can also find this information in your credit agreement or the information box included in the credit card application.

Federally regulated financial institutions must notify you before an interest rate increase takes effect.

Other credit card fees

Fees and penalties vary depending on the type of credit card transaction and the financial institution. Read your credit card agreement carefully. Ask your financial institution about anything you don’t understand.

Reprinting fees

Your financial institution may charge you when you ask for copies of certain documents such as:

To find out if you must pay reprinting fees, check your credit card agreement or contact your financial institution.

You may be able to avoid these fees by viewing your credit card statements online. Financial institutions usually allow access to online statements for the previous 12 months. To use this service, you need to register for it on your financial institution’s website.

Dishonoured payment fees

Your financial institution may charge you a fee to handle a payment that is dishonoured, or that bounces back.

This fee applies if you:

Inactive account fees

Some financial institutions will charge an inactive account fee if you don’t use your credit card for a long time. The financial institution may even close your account if your card is inactive for a year. If you no longer need or use your credit card, contact your financial institution to cancel it.

Learn how to cancel your credit card

To maintain or improve your credit score, consider keeping one account open with a low credit limit. Only keep what you need and can manage responsibly.

Using your credit card in a foreign country

When you use your credit card outside of Canada, your financial institution will apply:

Foreign currency conversion charges

Financial institutions calculate foreign currency charges in different ways. They convert some transactions directly into Canadian dollars. They may convert some transaction to U.S. dollars and then to Canadian dollars. They apply the foreign currency conversion charge after converting the purchase to Canadian dollars.

Example: Foreign currency conversion charge calculation

Suppose you made a €1,000 purchase with your credit card. The exchange rate is 1.45 to convert euros directly to Canadian dollars. Your credit card agreement shows a conversion rate of 2.5%.

Table 1: Example of the calculation of the foreign currency conversion charge
Steps to calculate the conversion charge Example
Step 1: Convert your purchase in Canadian dollars €1,000 × 1,45 = $1,450
Step 2: Multiply the amount of your purchase in Canadian dollars by the conversion rate $1,450 x 2.5% = $36.25
Step 3: Add the conversion charge for the total amount of your purchase $1,450 + $36,25 = $1,486.25

The total amount of your purchase is $1,486.25 in Canadian dollars. Read the terms of your credit card agreement for the total foreign currency conversion charge. Ask your financial institution about anything you don’t understand.

Foreign cash advance fees

The fee for a cash advance outside of Canada is typically higher than it is in Canada. A foreign currency conversion charge may also apply to a foreign cash advance. You’ll need to pay interest charges from the date you take out the money until you pay back the full amount.

Returning items you purchased outside of Canada

If you return items you bought with a foreign currency, the refund that appears on your statement may be for a different amount than your purchase. This is because the exchange rate varies from day to day. It may be different on the date the refund goes through.

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