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Use this guide to understand day-to-day credit card usage and fine print.

Credit cards are a prevalent part of our daily lives. The idea of a cash transaction now seems foreign – particularly to those born since the turn of the century! Consumers must educate themselves on sound credit habits and pair them with the best credit card they can find in Canada.

Canadians spent more than $1400 monthly on their credit cards in 2021. But that card in your wallet is one of the country’s most significant drivers of household debt. Due to steep credit card interest rates, thousands of customers pay millions in late payment fees each year.

It is essential to understand the day-to-day use of credit cards and the fine print that guides their use.

How Credit Cards in Canada Work

Before we dive into credit card best practices, a brief overview of their function is helpful.
Credit cards link to a bank or other lender credit (or loan) account. As a result, cardholders do not use cash from their bank account when making purchases in stores or online. Instead, the lender funds the spending for the account holder.
Most credit cards have a preset “credit limit.” This lender-set amount is the maximum amount of credit (loan) a cardholder can access at any given time. The credit limit essentially represents the upper cap on what you can charge to your credit card.
  • How Credit Cards in Canada Work

    Before we dive into credit card best practices, a brief overview of their function is helpful.

    Credit cards link to a bank or other lender credit (or loan) account. As a result, cardholders do not use cash from their bank account when making purchases in stores or online. Instead, the lender funds the spending for the account holder.

    Most credit cards have a preset “credit limit.” This lender-set amount is the maximum amount of credit (loan) a cardholder can access at any given time. The credit limit essentially represents the upper cap on what you can charge to your credit card.

  • Is a Credit Card a Revolving Line of Credit with a Card?

    It is best to think of a credit card as a revolving credit line, but with a card to access the funds in real-time.

    When you reach the cap, you must make partial or complete repayment before spending can resume. If you repay the spent amount in full, you can immediately re-access the entire credit limit. However, if only partial repayment is made, you can only access the repaid amount (and any amount still available on the card’s limit).

  • How Do Credit Card Repayments in Canada Work?

    Credit card account payments usually “post” immediately. A payment “posting” means the repaid funds are applied to the credit card account balance. You can use the card’s entire limit again if payment is made in full. If you make a partial payment, you can only use the repaid amount and any available credit you may have had on the card.

    If that sounds confusing, here is an example: A Canadian consumer has a $5,000 credit limit. The consumer spends on their card and eventually reaches the $5,000 limit. The lender then stops them from spending more on the credit card.

    Then, the consumer decides to repay $3,000 to the credit card lender, bringing the balance down to $2,000. So our Canadian consumer is free to spend $3,000 more on the card but still owes the lender an additional $2,000 to reach a zero balance.

Here is the catch, though: credit cards are not free money. Most credit cards allow users to pay back the money they borrowed for purchases within a month. After that, they charge interest rates of 23% APR or more. So, in the example above, if the consumer did not pay back the $2,000 balance on time and kept it for a whole year, they would have to pay up to $460 more! That does not include any other fees or penalties.
You must use credit cards responsibly. It is easy to impulse buy or spend beyond your means. It would be best if you adequately managed your credit and spending habits. But how do you do that?

Do Credit Cards Impact Your Credit Score in Canada?

Several factors determine your credit score. These factors include payment history, the ratio of used credit versus total available credit (generally considering all of your indebtedness), and the length of your credit history.

The report also considers how many inquiries are on your credit file. Your credit score accounts for all your outstanding credit from credit cards, mortgages, and student loans. The score also considers utility and other day-to-day bills.

Most Canadians over 18 have at least one credit card. As such, this credit account is a significant driver of your overall credit score. Payment history is the most critical factor. Your on-time payments demonstrate to lenders that you can manage your spending and debts.

Not paying your credit card bill every month (or whenever it is due) can negatively impact your credit score. Similarly, making on-time repayments can boost your credit score and report and make you a more attractive borrower. This uplift can result in better interest rates and other terms on future credit facilities, such as a Canadian mortgage.

How You Manage Your Credit Cards Matters

Using a credit card is not the only way they can impact your score. For example, your score is affected even by your decision to open or close a credit card.

For example, a potential card issuer performs a “hard inquiry” on your credit file when you apply for a credit card product. This inquiry is a deep-dive review of your credit history to determine your level of risk as a borrower. A hard search stays on your credit report for two years.

“Soft inquiries” do not impact a credit score. A soft credit search is usually done to verify your eligibility for a credit card or other financing. You must understand which inquiry is being performed when exploring new personal credit options. Many hard inquiries are unattractive to borrowers, mainly if they result in the application being rejected.

In addition, a credit card is considered “revolving credit” since it allows the user to draw, repay, and then draw funds again against a credit limit. This credit arrangement is contrary to term credit, such as an unsecured loan. Over time, these loans are paid back in installments, and the repaid amounts are not accessible once paid in. If you have instalment credit, such as a student loan, and apply for a new credit card, the mix of installment and revolving credit can boost your score. This credit diversity shows lenders you can handle varying types of credit.

Credit Tips!

When using a credit card, only spend what you can afford. The interest rates on most cards are prohibitively high and can trap you in debt if you’re not responsible. Whenever possible, pay your balance in full. Purchases typically start accruing interest thirty days after the transaction is completed.

Review your credit card statements each month to ensure accuracy. This is important as it allows you to pinpoint errors and quickly identify if you have been the victim of credit card fraud. If you spot any charges you do not recognize, contact your credit card provider immediately to report any discrepancies.

The Effects of Closing a Credit Card Account

The act of closing a credit card account reduces the amount of total credit available to you. As a result, this action potentially increases your credit utilization rate and, therefore, can decrease your credit score.

For example, a Canadian consumer spends an average of $1,500 monthly on their credit card. The cardholder has two credit cards with a credit limit of $5,000 and $1,000, respectively. The utilization rate would be $1,500 / ($5,000 + $ 1,000) = 25%.

If the consumer decides to close the $1,000 credit card, then the utilization rate is $1,500 / $5,000 = 30%. To a credit bureau and, by extension, lender, that represents a less desirable credit candidate than when they utilized 25%. As such, it may be worthwhile to keep credit accounts open even if you do not use them frequently.

How to Pick the Best Credit Card in Canada

The best credit cards in Canada are a highly subjective matter. Consumers have distinct preferences, as well as varying constraints. Consequently, no single credit card is suitable for all users. However, there is such a thing as the right credit card for you. To find the right card, you can follow the below steps.

  1. Step 1

    Know your credit score and obtain a copy of your credit report

    In Canada, you are entitled to a free copy of your credit report every twelve months. Take advantage of this and obtain this critical information. Your free report provides you with your score, up-to-date credit usage information, and items that might impact your score.

    In addition, you can also see if there are any errors in the report and file any necessary disputes. These errors may be the difference between approval for a great and not-so-great credit card.

    Remember that the best credit cards in Canada offer benefits such as lower interest rates, dedicated customer service, or a concierge to assist you with dinner reservations or theatre tickets. Therefore, you must always understand your credit score and what credit cards you qualify for.

  2. Step 2

    Determine your current and future spending habits

    Go back to your previous credit card statements, and determine how much credit you use each month. Are you a big spender, or are you thrifty? Do you see this changing in the foreseeable future? Knowledge of your spending habits is essential in Step 3.

  3. Step 3

    Understand your priorities and position

    • Students and people with limited to no credit history

      Part I

      Student credit cards are entry-level products with limited “frills” and no annual fees, particularly for students just starting their financial journey. Similarly, a secured credit card allows a borrower to pay cash upfront to a security account as collateral. Once the customer demonstrates strong repayment habits, the lender returns the collateral, and the account becomes unsecured.

      A secured card may be a good option for someone new to the country. Secured credit cards are helpful to borrowers with no established credit history or those looking to rebuild their credit. Knowing what you are getting into with these cards is essential. Make sure you ask the following questions:

      • Are there any annual fees charged to the card?
      • Do my repayments on the card get reported to credit agencies? Unfortunately, some secured cards do not get reported, which defeats the purpose of using them to build your credit score.

      The best credit cards in Canada have “kickers.” For example, some student credit cards see increased credit limits once the borrower demonstrates a good repayment record. Some secured cards also put your security deposit into an interest-bearing account, so the collateral you receive back when you upgrade to an unsecured version is more than what you initially put in.

      If you have to choose between student or secured cards, these perks can be deciding factors that narrow down your final choices.

    • Specific personal borrowing needs

      Part II

      Some borrowers may have specific financial needs. With a good credit score, they can find cards that offer a 0% introductory APR and low ongoing interest rates. For example, if you have a consistent income stream and occasionally carry a balance on your account, cards with low interest might be the best fit. When pursuing this such options, ensure you’re asking questions such as:

      • What are the fees for late payments on this card? Is there a waiver option? If so, what are the criteria to meet it?
      • What is the APR once the introductory or promotional rate expires?
      • How long does this promotional offer rate last before the actual rate kicks in?
    • Selecting between cash back and travel rewards

      Part III

      If you’re looking for the best credit card, look for a card with incentives – cash back, travel rewards, or points. When deciding between these three types of cards, the choice ultimately comes down to what you answered in Step 2.

      What do you value the most? Earned cash that you can use to pay down your bill? Travel rewards that allow you to book trips or vacations? Or do you want to earn points that you redeem for items such as a new iPhone, a Nintendo Switch, or other new gadgets?

The Best Cashback Credit Cards in Canada

Canada’s best cashback credit cards provide physical dollar returns based on your spending. You can use these funds to lower the balance on your card, redeem them as a gift card, or direct deposit them into a bank account.

The primary advantage of this card type is how easy it is to receive the rewards it offers. As you spend, the rewards accrue and can be automatically set to redeem when eligible. If you do not spend a lot, a cashback credit card may still be optimal for you, as few cashback cards charge annual fees, and rewards redemption is flexible and accessible

On the downside, these credit cards do not come with the same welcome bonuses and other promotions as the travel rewards cards described below.

Travel Credit Cards in Canada

Credit cards that provide travel-related rewards offer accountholders air miles or travel points. You can redeem them for flight tickets, accommodations, lounge access, or free baggage checks. This card type is helpful if you are a regular spender and are willing to wait and defer your rewards for big payouts.

However, most travel cards charge an annual fee. If you intend to spend a lot on your card, this annual fee is more than offset by the rewards you will receive. If not, the travel card can be more expensive than a cashback card, which often has no associated annual fees.

On the downside, these credit cards do not come with the same welcome bonuses and other promotions as the travel rewards cards described below.

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