How Credit Cards Work In Canada?
Whether you are a student, a professional or a newcomer to Canada, you may have been told that a credit card is a ‘must have’ in this country. If you come from a part of the world that does not believe in credit but rather on your net worth asset then you may be fairly surprised. As you blend in, you sign up for a credit card and before you know you may have credit cards of all hues in your wallet within a short period. Yes, credit cards have become the most popular mode of payment for retail and online shopping. So, how do credit cards work in Canada?
Basics of Credit Cards in Canada
When you use a credit card you are borrowing money, just like a loan for which you pay an interest fee to the credit card issuer. If you pay back the entire borrowed money within the grace period then you may not pay any interest. For most credit cards the grace period ranges from 21 days to 30 days. In case you do not pay off then you may pay an interest on the balance that you carry on that card. You may also choose to pay just the minimum amount due on your credit card every month. Credit card issuers calculate your minimum amount as per your credit rating, interest rate, principal borrowed and the credit limit. It is not a healthy habit to just keep on paying the minimum amount since you may accumulate more debt than you could manage in the long run.
If you are late or miss a payment then they may charge you late fees and if you continue to do so then your rates may also increase. You may also borrow cash advances on your credit card from an ABM. But, beware of the high-interest rates that kick in from the time you withdraw. There is also an option to transfer a balance from one card to another for a promotional rate. Again, if you transfer and then forget all about it, you may end up paying more interest after the promotion. A credit card is a convenient replacement for cash if used wisely. However, if you give in to temptation then you may overspend and end up in a vicious whirlpool of debt.
How Do Credit Card Companies Make Money?
When you sign up for a credit card then you may check for the interest rates and credit limit etc. If you read the fine print then you may also note that there is an array of fees and charges for that credit card too.
- Fees: These may include annual fees that a few companies may not charge. If you go over your credit limit then you may pay a fee for that. Miss a payment and you may pay a late fee and if you make it a habit then you rates may get reviewed. Then, there are fees for using your credit card for a balance transfer or cash advances. For any purchases in a foreign currency, you may also pay a fee for conversion.
- Interest: Credit card companies make money from the interest charges on balances that you carry on that card. The interest rates could be different for purchases, balance transfer, and cash advances. If you carry no balance then there is no interest payable.
How Credit Cards Are Made?
A credit card is primarily made of plastic that is very flexible, lightweight, water-resistant and durable, known as polyvinyl chloride acetate. This polymer is a blend of vinyl chloride and vinyl acetate. The other main component in a credit card is the magnetic strip that has a coating made of iron oxide. A few credit cards may even have a RFID chip and other metallic parts. The credit card is assembled in sheets using a dye machine for imprinting the graphic and text of the issuer and then laminated. Some cards may also have a hologram security feature. This sheet of cards then goes through another machine that embosses and programs the individual name, card number, validity & expiry date etc. This process also imprints unique identification for every card and then the sheet is cut out to separate cards.
Why Credit Cards Are Bad?
If anyone tells you credit cards are evil then, that wise person may have learned it the hard way.
- Universal default factor: No matter what bill you defaulted on as per your credit report, the interest rates for your credit card may increase manifold as a result.
- Credit score damage: You may start borrowing too much on your credit card and pay only the minimum due. Or, sometimes you may miss a payment and then, your credit score takes a hit. What then happens is that you may not get that line of credit application approved or you pay high interest through your nose. You may pay hefty interest charges compared to others with good credit score and there are many pitfalls for having a bad credit rating.
- High rates: Credit card companies make their money off your interest charges. Most of them have double-digit rates that are not going to help you pay off your debt soon.
- Fine print & hidden fees: If you read any credit card issuer agreement then you may find that it does not favor you. These are in very ‘fine print’ and may highlight the promotional rates but there may be hidden fees. You may have to carefully read through to make sure that you did not miss any information on rates and fees. Even the interest rates on the card may change with time and this would also be in that fine print, but only if you care to look for it.
- Minimum payments are deceiving: The concept of the minimum payment is that you pay that small amount and continue your credit card debt for a long time. The longer you carry that balance, the more it will benefit the card issuer as you will keep paying interest charges.
Individually specific reasons
- Increase impulsive shopping: With a credit card in your wallet your style of shopping changes. You no longer think about purchasing an expensive item which otherwise you may not have by spending cash. On the spur shopping for unnecessary items, just for instant gratification is seen more amongst credit card users. Whether retail or online shopping it is very tempting to just swipe or punch in the credit card number.
- Overspending: You may spend more than you ever wanted to if you shop with a credit card. As long as you keep spending and pay off only the minimum due each month, your debt builds up. Your savings may diminish as you overspend with your credit card and then struggle to pay off that debt.
Why Credit Cards Are Good
Just like every coin with two sides, credit cards do also have their positive features. A responsible user of credit card would know how much to borrow and pay off the balance so as to not pay hefty interest charges.
Positive features of credit cards:
- Monitor your purchases: When you shop with your credit card then you may monitor your purchases as per your monthly statement. This helps you to understand your spending habits.
- Rewards: There is a host of rewards options that most credit cards come with. This includes travel, Airmiles, cash back, rebates, discounts etc.
- Avoid overage charges: Most debit cards charge a fee for going over your monthly transaction allowance. To avoid this charge, you may use your credit card and then pay off the amount.
- Build good credit: Using a credit card to borrow small amounts and paying them off can help to build up some good credit. It really helps to get mortgages and short term loans when you have a good credit history. You may also negotiate for better rates with a good credit score. Credit scores may also matter when you apply for a job or insurance too.
- Emergency funds: With a credit card in your wallet, you know that in a worst case scenario you may use it for an emergency. A credit card is handy when you do not carry much cash around.
- Secure: The theft and fraud protection features of credit cards may help you to shop in a secure manner. You may not find the same level of fraud protection for a debit card.
- Convenient: It is convenient to carry a credit card in your wallet when compared to cash. The risk of losing the cash is also high or even worse, somebody may steal it.
- Extended warranty: When you purchase a product with a credit card then most often you may get extended warranty on that product.
- Retail shopping discounts: If you use a retail store credit card and shop quite often then you may save significantly and get discounts.
Types Of Credit Cards In Canada
There are myriads of credit cards in Canada that can be broadly categorized based on 3 factors. These criteria may include the card type, credit qualification, the bank or credit card issuer. Let us break this down further as follows:
|Card Type||low interest, no annual fee, rewards, airline/travel, gas/auto, cashback, student, business, U.S. Dollar account|
|Credit Qualification||fair, good, excellent, no credit history or bad credit|
|Bank or card issuer||Amex, BMO, TD, MBNA, Capital One, MasterCard, HBC, Visa, RBC, Tangerine, Rogers, Scotia etc.|
How To Choose Credit Card In Canada
In Canada, there are so many choices for credit cards that it is not easy to wrap your head around choosing one. When choosing a credit card you may have a different type of need for applying for one in the first place. Maybe you want to start building some credit or repair your bad credit. Or, you may need some emergency funds or want to have a backup just in case you are in need. To compare a credit card with another may not be as easy as ticking off some boxes. There are cards to suit different types of customers and their preferences. Some may prefer to pay no annual fee but do not mind the high APR as they rarely carry a balance. Others may like to have a low-interest card with some reward options as well.
To find that perfect card that gives you all you need can take a bit of serious research and careful selection. It is very important to know your own spending habits and then match it with the credit card requirement for those habits. As an example, if you find yourself shopping at Costco every week then it does not make sense that you apply for a Walmart cash back credit card. Most importantly, you may have to take some time out to read the fine print before you sign up for any credit card. You may pay attention to the fees, transaction charges, interest rates and their terms.
Why Credit Cards Are Better Than Debit Cards
If used responsibly and wisely then credit cards can be better off than a debit card. It sure beats not having to carry around lots of cash in your wallet which could be risky. Your debit card is directly attached to your checking or savings account and the money goes out real time during a transaction. Whereas, when you use a credit card you borrow that money from the issuing bank or company that you may repay. Debit cards may not help you build credit but credit cards can help you with that and secure a mortgage or loan with good credit rating. You may use your debit card for only as many funds you have in your account. If you go over your balance then you may pay overdraft fees which can be expensive.
Debit cards do not have the same level of theft, fraud or purchase protection that you may find in a credit card. Most credit cards even come with some level of insurance benefits that are rarely found in a debit card. Time is of the essence when you report a fraud on your debit card and in most cases just 2-3 days. However, you may dispute a charge or fraudulent transaction on your credit card much later on. Most banks may have a set number of free transactions for a month with a debit card. You may pay a fee if you use your debit card for more than your allowance. Credit cards do not have any such restrictions. Credit cards have a great scope for earning discounts, rebates, and rewards.
How Credit Cards Calculate Interest In Canada
You may be charged an interest for the type of transaction that you use your credit card for. If you use it for a purchase then you may be charged an APR. Or, if you transfer a balance or obtain a cash advance then the interest rate may vary. When you make a new purchase you are not charged interest right away. But only if you do not pay off the entire amount before the due date. This period that you have to pay off the full amount and save on interest is the grace period. If you carry a previous month’s balance then that incurs interest charges till you pay it off.
Usually, card issuers add up the daily balance and divide it by the total number of billing days. This gives your average daily balance. They then multiply this and the daily interest rate (annual rates /12). This is then multiplied by the number of billing days in that period. This is known as the daily balance method and calculates any interest that you owe at end of day.
Daily balance X Daily interest rate = Daily interest amount
For an APR of 19.99% on a credit card balance of $1000 the calculations may look like this:
0.1999 ÷ 12 x 1000 x 1 = $16.65 (Interest charge for that month)
What Credit Cards Does Costco Canada Accept
Costco Canada accepts the following cards and payment methods at their warehouses:
- Debit Card
- Costco Cash Card (purchased online or at any Costco location and can be pre-loaded from $50 to $1,000)
- Personal Cheque
Costco Canada accepts the following payment methods at gas stations:
- Debit Card
- Costco Cash Card
- Cash is not accepted at Costco gas stations
If you are making a purchase on Costco.ca then you may use the following payment methods.
- Visa credit card (visa debit not accepted)
- Costco Cash Card