You should not rely on this booklet for legal advice. It provides general information only.
What does a credit card cost? (September 2009)
How Interest Charges Are Calculated
Low Introductory Rates
The Interest-Free Period on New Purchases
Credit card balance insurance
Credit Card Fees
Annual fees
Annual fee for additional cards
Cash-advance fees
Balance transfers
Using a credit card for bill payments
Convenience cheques
Over-the-limit fees
Fees for dishonoured cheques and payments
Inactive credit balance fees
How Interest Charges Are Calculated
If you don't pay the full amount owing on your credit card by the due date, your credit card company will charge you interest depending on the type of transaction:
- New purchases appear on your monthly bill or statement for the first time and under certain conditions can be interest-free.
- Previous purchases are purchases that were not paid off from a previous statement. You are charged interest from the date you made these purchases until they are paid for in full. Some credit card companies will charge you interest from the date the purchases are posted to your account.
- You are charged interest from the date you make a cash advance. There is no interest-free period on these transactions.
Low Introductory Rates
Your credit card company may offer you an attractive introductory interest rate on a new card, or on balance transfers to your existing card. If you tend to owe money on your credit card, this kind of offer can save you money.
However, these low rates generally apply for a limited time only. As soon as the introductory period ends, the rate increases to the card's regular rate. To find out what the regular rate is, ask your credit card company.
Before applying for an introductory offer, make sure you understand:
- what types of transactions the introductory rate applies to; when the introductory period will end;
- what the interest rate will be after the introductory period ends;
- whether the introductory rate will end if you make a late payment or go over your limit; and
- whether any other fees or conditions apply.
The Interest-Free Period on New Purchases
Normally, your credit card company does not start charging you interest on any new purchases. However, this interest-free period does not apply to balance transfers or cash advances. With these transactions, interest is charged immediately. The interest-free period has two parts:
- The time between the purchase and your statement date; and
- The grace period – the time between your statement date and your payment due date. (usually 15 to 26 days.)
If you don't pay off your entire balance by the due date you lose the interest-free period on new purchases and begin paying the higher interest rate on new purchases from the date you make them or, in some cases, from when they are posted to your account.
Credit card balance insurance
Financial institutions must give you information about credit card-related insurance services. Institutions offering credit card balance insurance are obliged to disclose the cost of this service and how customers may opt out or cancel the service. Many people are caught off guard by having to cancel the insurance. They don’t remember agreeing to it and often don’t realize it needs to be cancelled after the free trial period. Services such as credit card balance insurance are usually provided by a third party such as an insurance company, and not the financial institution that issues the credit card.
Credit Card Fees
To find out if your credit card company charges any of the fees listed below, check the terms and conditions of your credit card agreement or contact your credit card company directly.
Annual fees
Some credit cards have an annual fee. The annual fee often allows you to obtain extra rewards and benefits, or a lower interest rate.
You usually pay the annual fee once a year on the first monthly statement you receive when you get your card, or on the anniversary of the date the card was issued. If you add any options to your card later on, such as reward programs, the fee is usually prorated (adjusted for a time period) from the date these changes come into effect. However, if you cancel an option that is covered by the annual fee, you may not be paid back for the period you didn't use.
If you usually carry a balance on your credit card, you might be able to save money by getting a card with a low interest rate, even if it has an annual fee. This is because the low rate might save you more than the annual fee costs you.
Annual fee for additional cards
If you already have a credit card, you can add one or more cards to your account. You usually will have to pay a fee for any additional cards. However, this fee is usually lower than the annual fee charged for the main card.
Cash-advance fees
Whenever you withdraw cash with your credit card from an automatic banking machine (ABM) at your bank branch or use credit card convenience cheques, you have to pay a cash-advance fee. Interest is charged immediately on these advances. Since cash advances can be an expensive way to borrow money, you should consider options such as a personal loan or a line of credit instead. Likewise, if you withdraw money at an ABM that does not belong to your credit card company, you may have to pay a convenience fee that the operators of this ABM charge. A cash-advance fee can be:
- a fixed amount (usually from $1.25 to $5)
- a percentage of the amount of cash you withdraw (usually from one to four percent), or
- a fixed amount, as well as a percentage
There is often a minimum and a maximum cash-advance fee of between $1.25 and $10, although some cards have no maximum fee.
In order to reduce the amount of interest you are paying, try to pay off as much of your balance as you can, as early as possible. You don't need to wait to receive your statement before you start making payments on a cash advance.
Balance transfers
A balance transfer is the transfer of the money you owe from one credit card to another. This is considered to be a cash advance, and you can be charged cash-advance fees, as well as interest charges, on this type of transaction.
Using a credit card for bill payments
Your credit card company may also consider bill payments (e.g., cell phone, cable and utility bills) made with a credit card at an ABM, a bank branch, by phone or by Internet, as a cash advance, and charge you a cash-advance fee. To avoid paying cash-advance fees when you pay these bills with your credit card, you can see if your credit card company will set up pre-authorized payments on your card.
Convenience cheques
Convenience cheques, or credit card cheques, that you receive in the mail are usually treated in the same way as cash advances. Credit card companies often advertise these types of cheques as an easy way to pay your bills and get some extra cash. While these types of cheques may seem convenient, they can actually be very expensive, because you are charged interest immediately.
Over-the-limit fees
If you go over your credit card limit, you may be charged an over-the-limit fee for each transaction you make that is over your limit. Your credit card company will not inform you if you are about to go over your credit limit when you make a transaction. It is your responsibility to make sure you don't go over your credit limit. There are three ways to avoid over-the-limit fees:
- Ask your credit card company to increase your card limit. This can be useful when you are planning to make a major purchase and don’t expect to have any problems paying the credit card bill on time.
- Prepay your credit card, even if it’s paid off, to leave more available credit for future large purchases. Pre-paid cards are just like gift cards - you can only "charge" what you've paid onto the card ahead of time. They can be convenient for online purchases or when you’re travelling.
- Ask your credit card company to put a stop to any transactions that exceed your credit limit. Some credit card companies will do this, but others may not offer this. Even if they do, some types of transactions may still be processed, over your approved limit because some small value purchases sales go through without your credit card company being notified at the moment of sale.
Fees for dishonoured cheques and payments
Your credit card company may charge you a fee of between $20 and $45 to handle a dishonoured (bounced) payment by cheque or by pre-authorized payment. This fee applies if you make your monthly payment by cheque and the cheque is returned because of non-sufficient funds (N.S.F.). This can also happen if you use a convenience cheque to get a cash advance on your credit card, and your credit card company returns the cheque because you are over your limit.
Inactive credit balance fees
If there has not been any activity on your credit card for a certain period of time (usually a year) you may be charged a fee for maintaining an inactive account. If you have a credit balance (your credit card company owes you money), they may send you a cheque. However, if you have carried a credit balance for a long time, some credit card companies may charge you an inactive credit balance fee, which can be up to $30 a year. If you no longer need your credit card, protect your safety by making sure you contact your credit card company to cancel your card. Get in writing from them that your credit card has been cancelled and that your balance has been paid in full. Simply cutting up your card does not automatically cancel it, even if your card has expired. You may still have to pay an inactivity fee if you did not cancel the card.
For a comparative list of credit card service fees, go to the Financial Consumer Agency of Canada’s credit card service fees comparison table:
http://www.fcac-acfc.gc.ca/eng/publications/CreditCardsYou/ServiceFees/CCSerFeesTab-eng.asp
Many thanks to the Credit Counselling Society for reviewing this document.