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You should not rely on this booklet for legal advice. It provides general information only.
What is a credit card? (September 2009)
Credit card tips
When you receive your statement
Things to look out for!
Finding the right credit card for you
A credit card is simply a plastic card that allows you to pay for things with borrowed money. They can be convenient, and are sometimes necessary for some purchases, such as purchasing airplane tickets electronically or making hotel reservations.
They can also help you establish a credit history and work towards earning you a favourable credit rating. However, the convenience of a credit card has a price. When you borrow money, the credit card company charges you a fee, called interest.
If you are going to use a credit card, find out which one is the best fit for you by using Industry Canada's free Credit Card Calculator at: www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca01812.html. You can save money by knowing how credit cards work and which card is best for you. Credit cards vary in their rates of interest on late or overdue accounts. Typically, interest rates are between 9% and 29%.
The only way to avoid paying interest is to pay off your card every month in full before the due date. It’s important to remember that it can take up to five days to process your payment, so it’s a good idea to leave yourself five to seven days when paying your bill.
When your credit card arrives, it will have a card agreement or contract with it. Read this over carefully and make sure you understand it since it outlines the major terms and conditions of your credit card. Make sure you keep it in a safe place for future reference. The card agreement must provide you with the following information:
- the card's annual interest rate;
- how the interest is calculated;
- the grace period, if any, which is the time between your statement date and your payment due date. (Usually 15 to 26 days.)
- the date on or after which interest applies;
- how often you will receive your bill (it must be at least once a month);
- whether you have to pay the amount owing in full when you receive your statement, and the interest rate that applies if you don't;
- your minimum monthly payment or how this payment is calculated;
- any optional services available, such as credit balance insurance, the charges for each optional service, and the conditions for cancellation;
- any other charges or fees that apply;
- a local or toll-free telephone number that you can call, during business hours, to obtain information about your account.
Finally, the agreement must also tell you the maximum amount (no more than $50) you have to pay if your credit card is lost or stolen and someone has used it illegally. As soon as you report that your card has been lost or stolen, your credit card company can no longer hold you liable for any charges on the card. This is why it's important to report a stolen or lost card right away.
When your credit card company changes any features, terms or conditions of your credit card, they must give you the details of those changes in writing and must do so at least 30 days before any changes take effect.
However, there are some changes to your credit card's terms and conditions that don't require advance notice. For the following changes, the company must inform you within 30 days after they take effect:
- a change to your credit limit;
- an extension of your grace period (the time between the statement date and the payment due date – usually 15 to 26 days);
- a decrease in a charge that is not related to the interest rate; and
- a change to any optional service you accepted.
Credit card tips
- Save money by paying cash or by debit card whenever possible.
- Shop around for the best interest rate.
- Pay your credit card debt in full when it is due to avoid costly interest charges.
- Do not use more than two credit cards — the fewer the better.
- Having a lower credit limit forces you to use discipline in your spending habits. You can ask your financial institution to lower your credit limit.
- A line of credit, usually at a lower rate of interest, may be helpful in paying off credit card debt.
- Make sure you sign the back of your credit card.
- Only give your credit card number to companies or websites you trust.
- Never give out your Credit Card Personal Identification Number (PIN).
- Always review your monthly credit card statements and call your credit card company immediately if you see a charge you don’t recognize.
- Never lend your credit card to friends or family members. You are responsible for all the purchases they make on your card.
- Don't give personal information or your credit card account number over the phone or the Internet unless you're dealing with a company you know and trust.
When you receive your statement
Each statement must provide the following information:
- a description of each transaction made during the period covered by the statement, and the amount charged, including interest;
- the date each transaction was posted to your account;
- the amount you must pay, on or before a specified due date, to benefit from the grace period; and
- the amount charged during that month for each of the following:
- Purchases made.
- Advances received.
- Payments made.
- Interest charges.
- Other charges.
Things to look out for!
Low or No Interest Rates: Read the fine print. Low or no interest rates are usually a limited time offer. If you don’t pay the entire bill within six months, you can end up paying interest on purchases you made during the interest-free period and your credit card company may void your low interest rate altogether.
Cash Advances: Daily interest is charged from the time you borrow until you pay the advance in full. You also will usually pay extra fees for making a cash advance.
Convenience Cheques: Sometimes credit card companies will mail you convenience cheques. When you use a convenience cheque, the transaction is treated as a cash advance for the purposes of calculating interest charges. There is no interest-free period and you're charged interest until you pay back the amount of the cheque in full. If there is a delay in processing your convenience cheque, you may go over your limit if you have made other purchases with your card.
Overlimit Fees: Credit card companies may sometimes allow you to go over their credit limit. This may sound good but the credit card company then charges you an overlimit fee. Call your credit card company and ask them to set a firm limit, called a no pad account by the major banks.
Grace period: If you don't pay your balance in full every month by the due date, most cards do not give you an interest free grace period. You will pay interest retroactively on previous purchases.
Partial Payment Interest: If you pay less than the full amount owing on your statement by the due date, you will pay interest on the full amount. For example, if you pay $500 of a $520 balance by the due date, most cards will charge interest on the entire balance of $520.
Interest Rate Change: Most credit card companies will increase the interest rate on your card if you are even one month behind in payments. Check your statements carefully each month.
Store Cards Versus Regular Cards: Department store credit cards have interest rates that start at 28.8% and can be as high as 45%. Getting behind on payments on store cards can lead to a cycle of paying off minimum payments each month and not being able to pay off the full amount.
Converting Purchases Outside Canada:
If you use your credit card outside of Canada or for online purchases outside of Canada, the credit card company charges you a conversion fee, as well as the exchange rate, when you make a purchase. The conversion fee varies from 1.8 to 2.5percent of the amount of the transaction. If you then return the item, the exchange rate typically isn’t in your favour and you can be stuck paying the difference. For online purchases, make sure you only use your credit card on secure websites.
Finding the right credit card for you
To find a credit card that suits your needs, shop around and use the Financial Consumer Agency of Canada’s Credit Cards and You: Interactive Tools to compare service fees and features for different cards. Before signing, make sure you read your credit card agreement carefully and that you understand the terms and conditions of the agreement, including all of the fees that apply to credit card transactions made both in Canada and outside Canada.
For additional help on how to choose credit card that works best for you, see Your Credit Card Checklist, or use the Worksheet to Help You Choose a Credit Card( PDF Version).
Many thanks to the Credit Counselling Society for reviewing this document.
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