How credit cards work

From Financial Consumer Agency of Canada

Types of credit card transactions

You can use your credit card to make a number of different types of transactions.

Credit card purchases

You can use your credit card to pay for goods or services:

  • at a cash register or checkout, that is, a point of sale
  • over the phone
  • online

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, immediately contact the other financial institution that issued your credit card.

Find out how to resolve an unauthorized transaction.

Cash advances

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

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

  • taking out cash at an automatic teller machine (ATM)
  • getting cash from a financial institution

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 charged 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.

Cash advance fees

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

A fee may be:

  • a fixed amount per cash advance
  • a percentage of the amount of the cash advance
  • a fixed amount plus a percentage of the cash advance

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

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.

Cash-like transactions

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

  • wire transfers, from one financial institution to another electronically
  • money orders, a type of payment issued by a financial institution at your request, which is considered more reliable than a personal cheque because the amount is prepaid
  • travellers cheques, prepaid cheques in fixed amounts that allow the person signing them to pay for goods and services
  • gaming transactions, such as placing bets, buying casino gaming chips and buying lottery tickets

Like a cash advance, you’ll pay interest from the date you make the cash-like transaction. The interest charged 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.

If you’re not sure if a particular transaction will be treated as a cash-like transaction or as a regular purchase, check your credit agreement or contact your financial institution.

Credit card cheques

You can use credit card cheques to make purchases the same way you would with personal cheques. Credit card cheques are also called convenience cheques or promotional cheques. You can 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.

Credit card cheques are linked to your credit card account. If you use them to pay for goods or services, the amount will appear on your credit card statement.

Federally regulated financial institutions, such as banks, must get your consent before they can send you credit card cheques. If you choose to get credit card cheques as part of a special offer, make sure you understand all the terms and conditions.

If you don’t want to use credit card cheques, cut up them up before you throw them out to protect yourself against fraud.

Balance transfers

A balance transfer is when you pay off the balance from your current credit card by transferring it to a new card that generally has a lower rate.

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.

For example, if you transfer a $1,000 balance to a different credit card with a balance transfer fee of 3%, you'll be charged $30 for the 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 of time. Ask your financial institution about anything you don't understand.

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.

How interest charges are applied to your credit card

Interest is the money you’ll pay 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.

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

Interest-free grace periods

When you make a new purchase with your credit card, you have an interest-free grace period. The grace period begins on the last day of your billing period. Your billing period will appear checking your credit card statement. The grace period does not apply to cash advances, cash-like transactions and balance transfers.

Federally regulated financial institutions such as banks 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 on your February 1 bill. This means you have until the end of the grace period on February 21 to pay off the smartphone and your other purchases completely to avoid interest charges.

Fees and penalties

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:

  • reprinted statements
  • receipts from transactions on previous statements

To find out if you have to 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.

Over-the-limit fees

Your credit limit is the maximum amount you can spend on your credit card. Your financial institution won't inform you if you’re about to go over your credit limit. It’s your responsibility to pay attention to 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 if a merchant puts a temporary hold on your credit card that goes over the credit limit.

For example, 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 and pay for the gas. It only 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, you can 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, and if there are any fees if they do. Ask your financial institution about anything you don’t understand.

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:

  • make your payment by credit card cheque and the cheque is returned because of non-sufficient funds (NSF)
  • make your payment by a pre-authorized debit that’s rejected because of NSF
  • use a credit card cheque for a cash advance, and your financial institution returns the cheque because you're over your limit

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.

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

Learn how to cancel your credit card.​

Interest rate increases

If you don’t make your required minimum monthly payments by the due date, your interest rate may increase by as much as 5%. The increase may be temporary or permanent.

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

Using your credit card in a foreign country

When you use your credit card outside of Canada to pay for goods or services, your financial institution will apply:

  • an exchange rate for the purchase
  • a foreign currency conversion charge

Foreign currency conversion charges

Financial institutions calculate foreign currency charges in different ways. Some transactions are converted directly into Canadian dollars. Others may be first converted to U.S. dollars and then to Canadian dollars. The foreign currency conversion charge is applied after the purchase is converted to Canadian dollars.

Example: Foreign currency conversion charge calculation

Suppose you made a €1,000 purchase with your credit card. The exchange rate is 1.42 to convert euros directly to Canadian dollars. Your credit card agreement shows a conversion charge of 2.5%.

After your financial institution converts your €1,000 purchase to Canadian dollars, it will cost $1,420. The 2.5% foreign currency conversion charge is applied to the $1,420 for a fee of $35.50. The total amount of your purchase is $1,455.50 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. Like a cash advance in Canada, 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 original 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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