An In Depth Guide to Credit Card Usage in Canada

Credit cards can seem simple on the surface, but understanding their nuances is a game-changer for your financial well-being. This guide to credit card usage in Canada will break down everything you need to know, transforming you from a credit card novice to a confident user. Let's dive in!

The Upside: Why a Credit Card Can Be Your Financial Ally (The Pros)

• Building a Good Credit History/Score: Every responsible swipe and timely payment acts as a building block for your credit score. This score is a crucial factor when you want to apply for major loans such as cars, mortgages, and even some rental agreements. A good credit score unlocks better interest rates and higher approvals, which can end up saving you a lot of money over time.

• Card Rewards and Benefits: Many credit cards come with enticing rewards programs. Imagine earning cashback on your everyday purchases, accumulating travel points for your next vacation, or enjoying perks like purchase protection and extended warranties on your buys. These benefits can add real value to your spending. For instance, a card offering 2% cashback effectively saves 2% on all  purchases, giving you a discount every time you shop. If you pay your balance back in full every month, these reward programs are a great way to earn extra perks for the everyday shopping that you have to do anyway! 

• Enhanced Security Against Fraud: Unlike debit cards, where fraudulent charges directly withdraw from your bank account, credit cards offer an extra layer of security. You're often not liable for unauthorized charges, providing peace of mind. Reporting a fraudulent transaction on a credit card is generally a smoother process than recovering funds from a compromised bank account.

• The Potential for Interest-Free Borrowing: If you pay your credit card balance in full by the due date each month, you essentially get an interest-free loan! This grace period allows you to make purchases and pay for them later without incurring any extra charges. This is a slippery slope and must be done with caution however, ensuring that you only borrow what you can fully pay back by the statement due date.

  
  

Decoding the Mystery: Breaking Down Your Credit Card Statement

That monthly statement might look like a jumble of numbers and terms, but let's demystify it:

Imagine your statement as a financial report card for your credit card activity during a specific Billing Cycle (e.g., March 16th to April 15th). Here is what you will typically find in the cover page of a credit card statement.

1. Billing Cycle: These are the dates that the current statement covers. For most credit cards, it is a one month timeframe.

2. Payment Due Date: Mark this date on your calendar! This is the deadline by which your payment must be received to avoid late fees and potential interest charges. 

3. Minimum Payment: This is the smallest amount you're required to pay to keep your account in good standing. This payment is beneficial to your credit score and avoids fees for late/missed payments however, paying only the minimum means you'll accrue interest on the remaining balance, potentially costing you significantly more in the long run. Think of it as the absolute bare minimum, not the ideal amount to pay. 

4. Total Balance: This is the total amount of money you owe on your credit card as of the statement date. This is the amount that must be payed by the payment due date to avoid any interest from accruing

5. Credit Limit and Available Credit: The credit limit is the maximum amount of credit the card issuer has extended to you. In this example statement, the credit limit is $20,000. The available credit is the difference between your credit limit and your current total balance. It shows you how much more you can still spend on your card. For example, since the credit limit is $20,000 and the current balance is $1900.23, the available credit will be $20,000 - $1900.23, which equals to $18,099.77 as seen on the statement.

6. Reward Program Details (If Applicable): This section lists any rewards points or cashback that you have accumulated during the billing cycle. Here you can see the benefit to responsible credit card use, as there is almost $50 of cash given back!

7. Interest Charges, Fees, and Purchases: This part of the statement gives an overview of how the total balance was calculated. The total balance includes all purchases, interest, and fees that occurred in the billing cycle as well as any remaining balance from previous statements (if applicable). If you carry a balance from month to month, you'll see interest charges. These are calculated based on your Annual Percentage Rate (APR), which is the yearly interest rate on your outstanding balance. The higher the APR and the longer you carry a balance, the more interest you'll pay. Also, be aware of potential fees such as annual fees (some cards charge a yearly fee for membership), late payment fees (incurred if you miss your payment due date), and over-limit fees (charged if you exceed your credit limit). Finally, purchases include any transaction you have made with the specific card over the billing cycle. You can see a list of every single transaction for that month on the last page(s) of your statement, so make sure you review it to see where exactly all your money is going!

Mastering the Art: How to Use Your Credit Card the Right Way

Using a credit card responsibly is key to unlocking its benefits and avoiding financial pitfalls. Here's your guide to mastering the art:

• Pay Your Balance in Full (and On Time!): This is the golden rule. Paying your statement balance in full by the due date every month allows you to avoid interest charges entirely and maintain a healthy credit score. Set up automatic payments to ensure you never miss a deadline.

• Stay Well Below Your Credit Limit: Aim to use only a small portion of your available credit. Maxing out your credit card can negatively impact your credit score, signaling to lenders that you might be overextended. A good rule of thumb is to keep your credit utilization ratio (the amount of credit you're using compared to your total credit limit) below 30%. To calculate your credit utilization ratio, simply divide your current balance by your credit limit. In the example statement, the credit utilization ratio is 1900.23/20,000 * 100%, which equals 9.5%. This ratio is well beneath the 30% threshold and is beneficial to your credit score! 

• Budget and Track Your Spending: Don't treat your credit card as free money. Integrate it into your budget and track your purchases diligently. Knowing where your money is going will help you avoid overspending and ensure you can pay your balance in full. Use our budget planning tool to create a monthly budget and stay on track with your spending!

• Review Your Statements Meticulously: Each month, take the time to carefully review your credit card statement for any errors or unauthorized transactions. Report any discrepancies immediately to your credit card issuer.

• Understand Your Card's Terms and Conditions: Take the time to read the fine print when you get a new credit card. Understand the APR, fees, rewards program details, and any other conditions. Knowledge is power!

Conclusion: Empowering Your Financial Journey

Credit cards, when understood and used responsibly, can be powerful tools that offer convenience, security, and valuable rewards while helping you build a strong financial foundation. By understanding how they work and adopting smart spending habits, you can unlock their benefits and navigate your financial journey with greater confidence. So, take control, be informed, and let your credit card be a partner in achieving your financial goals!

​What are your biggest questions about credit cards? Share your thoughts in the comments below!