Credit card

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Having one or more credit cards is a fact of life for most adult Canadians. Credit cards can be useful for purchasing, however they should be used wisely. When you apply for a credit card, you agree to charges such as annual fees, and terms and conditions such as credit limits, interest rates, and grace periods. You should know the Terms and Conditions of the credit cards you are using. Credit card issuing companies are also subject to rules on what they can and cannot do, and what must appear on your monthly statement.

Consumer advocates[1] recommend you set the goal to pay off your balance in full by the due date every month. You can also avoid interest rate charges if you don't use your credit card for cash advances. Interest rates on credit debt are among the highest rates in Canada.

When using your credit card to make purchases in foreign currencies, you should review your cardholder agreement to be aware what charges and fees are changed by your credit card issuer. A foreign exchange charge of 2.5% to convert transactions made outside of Canada into Canadian currency is fairly typical.[2] There are credit cards available to Canadian consumers that do not charge these foreign exchange fees.[3]

Terms and conditions

Credit limit

Your credit limit is the maximum amount that you (and your authorized users) can charge on purchases, cash advances, interest and fees. Your credit card issuer may from time to time allow you to exceed your credit limit, but they will charge an overlimit fee.

Getting close to your limit (even without exceeding it) affects your credit score negatively.[4] For this reason, it is recommended to keep balances below 20-30%[5], 35%[6] or 50%[4] of your limit.

Interest charges

Your should plan to pay your full balance every month to avoid interest charges.

Your credit card statement will indicate the minimum monthly payment required. If you don't pay the full balance on the due date you subject yourself to interest changes -- typically about 20% per year. The FCAC Credit Card Payment Calculator Tool will let you calculate how long it will take to repay your debt if you only pay the minimum. For example, paying only $20 per month on a $1000 balance at 20% interest means it will take you 26 years and 4 months to repay it, and cost you $3084 in interest, on top of the original $1000.

You should be aware of how payments are applied when the balance is not paid in full.

Some credit card issuers offer low introductory interest rates on new cards and on balance transfers. Generally, the low-interest rate will apply for a limited time only, then the rate increases to the usual rate.

Be careful with store-issued "pay no interest for a limited time" promotional cards. Missing a payment, or failing to meet the minimum payment amount, could result in interest rates charged at a maximum rate of 28.8% starting from the time of purchase - not when the payment was due. Read your cardholder agreement carefully.[7]

Service fees

Fees charged on credit cards vary by issuer. Many credit cards have an annual fee, although your financial institution may offer a banking package that waives the annual fee. If your credit card issuer changes any features or any of the terms or conditions of your credit card, the issuer has to give you the details of these changes in writing at least 30 days before the changes go into effect.[8]

Credit card issuers charge fees if you make a cash advance using your credit card.

Many credit card issuers charge an overlimit fee if your balance is over your credit limit.

Grace period

The grace period is the interest-free period when you make purchases with your credit card, but does not apply to cash advances or balance transfers. The grace period must be a minimum of 21 days.[8]

Right of Offset and your credit card

Most financial institutions have wording similar to this in their Terms and Conditions:

"We can apply a positive (credit) balance in any of your accounts with us, The Toronto-Dominion Bank and its affiliates (excluding registered accounts) against any debt or liability you owe to any of us,The Toronto-Dominion Bank or any of its affiliates, however arising. We can set off any positive balance against any such debt or liability in any manner and at any time we consider necessary (unless we have specifically agreed not to do so) and we are not required to first give you any notice. "[9]

You should give consideration to keeping your credit card at a separate financial institution from your savings. If you have a dispute with your credit card company they will not have the option of just taking your savings money without notice. The Financial Consumer Agency of Canada FAQ addresses this issue in more detail.

Traveling and your credit cards

When traveling beyond the normal usage pattern for your credit card, most credit card issuers recommend that you please contact them ahead of time to let them know of your plans. This will ensure that your account is protected during your travels. It will also reduce the odds that your account gets "frozen" by the credit card company while overseas. Should that happen anyway, a second card from a different issuer might come in handy for a few hours... The first card can then be reactivated at your convenience by calling (collect) the issuer to tell them you are using your card overseas.

If your credit card is a Chip & PIN type card, you are normally advised to check the countries that you'll be visiting to ensure that your PIN will function correctly. When traveling however, you should consider choosing a four-digit PIN as some terminals and ATMs overseas will not accept a PIN with more than four digits.

Currency conversion

Main article: Currency conversion

When using your credit card to make purchases in foreign currencies, you should be aware of how foreign currency purchases are handled and what charges and fees are changed. A charge of 2.5% to convert transactions made outside of Canada into Canadian currency is fairly typical. There are credit cards available to Canadian consumers that do not charge these foreign exchange fees.

More recently, merchants have been offering the "convenience" of converting the amount owing at the point of sale, a practice known as dynamic currency conversion (DCC). In most if not all cases, it is a bad idea to consent to the use of this feature[10]. According to VISA Canada, "If you do not want to use DCC when making a purchase, then you have the right to refuse the offer and have your transaction billed in the merchant's local currency, which will then use Visa's conversion rate. If you did not agree to DCC, but see it on your bill, then you should ask your issuing bank to contest the charge."[11].

Unauthorized credit card charges

Fraudulent usage of credit cards is on-going and increasing problem. By the end of 2009, approximately 69.7 million credit cards were in circulation across the country. Of those, 541,580 accounts were compromised, which represent a small percentage (0.77%).[12]

To protect yourself you should regularly review the charges on your card, at a minimum when your monthly statement arrives. Should you find unauthorized charges on your credit card you should immediately contact your credit card issuing company, the number is on the back of your credit card and on your monthly statement. Also, review your credit card agreement. By law, your agreement must explain your maximum liability (the amount you would be responsible for) in the case of lost or stolen credit cards, or the unauthorized use of your credit card account number. The Canadian Banking Association has some useful information about Credit Card Fraud as does the Financial Consumer Agency of Canada, Credit card Fraud.

Reward and benefit programs

Three main types of reward programs exist: (1) cash-back, where the card holder gets a small percentage back each year as a reward; (2) retail rewards, where reward points accumulate and are used to purchase consumer goods from a specific store; and (3) travel rewards, where points or "dollars" accumulate and can be used to purchase plane tickets, and possibly hotel rooms, car rentals, and the like.[13]

FCAC offers a Credit Card Selector Tool which allows you to sort cards by annual fee, cash-back features, travel points, etc. Similarly, MoneySense has an annual feature on finding the best credit card.

See also

References

  1. 10 tips for wise credit card use - Canada - CBC News, viewed February 15, 2012.
  2. Financial Consumer Agency of Canada, Credit card service fees comparison table, viewed October 12, 2012.
  3. Financial Wisdom Forum topic: Best Credit Card, viewed February 13, 2014.
  4. 4.0 4.1 Global News, What affects your credit rating and how can you improve it?, March 2, 2015, viewed March 1, 2017
  5. LoansCanada, How Credit Cards Can Help (And Hurt) Your Mortgage Application, viewed March 1, 2017
  6. youngandthrifty.ca, How Canadian Credit Scoring Works, viewed March 1, 2017
  7. Buy Now...Pay Later, from Debt Canada: Your Canadian Credit Education Centre, viewed March 29, 2015.
  8. 8.0 8.1 FCAC, Credit Cards: Understanding Your Rights and Your Responsibilities, viewed February 13, 2014.
  9. Service Agreement TD
  10. Here's the simple rule you need to know when using a foreign ATM, viewed November 04, 2012.
  11. Traveling with your Visa card, FAQs | Visa.ca, viewed October 12, 2012.[dead link]
  12. Credit Card Fraud - Royal Canadian Mounted Police, viewed August 23, 2012.
  13. M. Brown, Canada’s Best Credit Cards of 2014, MoneySense, September/October 2014, viewed February 2, 2015

Further reading

External links