4.3.5 Choosing a credit card

From: Financial Consumer Agency of Canada

There are hundreds of different credit cards available, each with different features, fees, terms of use and interest rates. To determine the best one for you, you need to shop around and compare the features and pricing of different cards.

Here are some things to consider:

The interest rate

If you pay your balance in full every month and don't use the card for cash advances, you won't pay any interest on most cards, so the interest rate may not be an important factor for you. However, if you usually carry a balance on your credit card, you may benefit from switching to a low-interest-rate card, even if it has an annual fee.

Example: Regular credit card vs. low-interest credit card

Harjit compares a regular card with a low-interest card.


Harjit is choosing between a regular card with an interest rate of 19 percent and no annual fee, and a low-rate card with an interest rate of 12 percent and an annual fee of $50. She typically has a balance of $500 that remains the same all year.

Card type

Interest rate

Interest

Annual fee

Annual cost

Regular card

19%

$95

0

$95

Low-interest card

12%

$60

$50

$110

With a continuing balance of $500, the regular card is less costly. But what happens if Harjit's balance rises to $1,000?

Card type

Interest rate

Interest

Annual fee

Annual cost

Regular card

19%

$190

0

$190

Low-interest card

12%

$120

$50

$170

With the higher balance, the low-interest card is less costly. Even so, carrying any balance is not a good idea. Harjit should aim to pay off her charges in full by the due date every month.

Additional fees and costs

Credit card issuers may charge a variety of fees and charges, including:

  • annual card fees
  • annual fee for an additional card
  • fees for cash advances and cash-like transactions
  • foreign currency conversion charges
  • charges for going over your credit limit
  • fee for maintaining an inactive account
  • interest rate increases for missed payments.

Read the fine print to make sure you are aware of all of the fees and charges that apply to a credit card before you complete the application.

Introductory low-rate offers

To encourage you to apply for their cards, issuers sometimes offer low interest rates on newly issued credit cards. Generally, the low interest rate applies for a limited time only. As soon as the introductory period ends, the rate increases to the card’s usual rate.

Read the application or agreement carefully to be sure you understand exactly what the promotional rate applies to, when it ends and what the interest rate will be thereafter.

Rewards and benefits

Some credit cards offer rewards and benefits such as extended warranties, purchase protection, air miles, points programs and Cash-back rewards. If you usually pay off your credit card balance each month, rewards and benefits may make an important difference for you when you choose a credit card. Balance the actual value of the reward program against other factors such as fees and limitations.

Be sure that the value of any rewards and benefits you receive is greater than any cost you pay to get them. Otherwise, they aren't worth it.

Example: Cash-back reward

Eric compares the costs and benefits of his credit card.


Eric pays an annual fee of $85 for his credit card. He pays his balance in full each month, and he gets one percent cash back on purchases. If he purchases a total of $4,800 using the card in one year, he will receive $48 (one percent of $4,800) at the end of the year. Compared with the $85 annual fee, the reward is not worth the cost.

Ask yourself how likely you are to use each benefit and how long it will take you to earn a reward. Remember that you have to use the reward for it to be a benefit and that rewards may expire.

See if you already have access to the benefit in some other way. For example, your auto insurance policy may provide coverage for rental vehicles, so you would not need that benefit on your credit card.

Carefully read the terms and conditions of any rewards program or benefits you are considering. There may be restrictions that limit the value and practicality of the rewards and benefits.

For more information

For personalized help in choosing the right credit card, use the Financial Consumer Agency of Canada's Credit Card Comparison Tool. You fill out a questionnaire about the features that are important to you, and the program lists all the cards in your province that meet your criteria.

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