Understand Credit Cards

One of the easiest ways to establish and build your credit score is with a credit card. As long as you don’t exceed your credit limit, pay your bill each month, and stay within your budget, you’re on the right track to financial stability. But what if you’re new to the world of credit? How do you know if you’re using your card responsibly?  We’ve come up with a list of some of the most common questions that new credit users have to help you understand credit cards.

What is a Minimum Payment?

At the end of each billing cycle, you receive a statement that lists how much debt you’ve accrued over the period. It also lists a minimum payment. The minimum payment is the lowest amount of your bill that you can pay back to your bank. If you pay less than that amount, then your payment is considered late. This is a vital piece of information you’ll need to understand credit cards and credit card companies.

Let’s say your statement says you owe $100.00 and your minimum payment is $10.00. Even though you still owe the bank the full $100.00 eventually, so long as you pay at least $10.00 for that month your account won’t become delinquent (which occurs when you miss a payment by more than 30 days)

What is an Interest Rate?

There are, of course, major downsides to only making the minimum payment on your credit card and they come in the form of increased debt thanks to interest. Interest is additional money your bank tacks on to how you much you owe according to how long you take to pay back the money you’ve borrowed from them in full. The interest that accrues on your account is determined by your interest rate. The standard interest rate for most Canadian credit card holders in good standing is 19.9%. This means that even if you make the minimum $10.00 payment on your $100.00 bill, you’ll still be charged an extra 19.9% for the remaining $90.00 you have yet to pay. The longer you keep on making only the minimum payments, the more the interest increases and the larger your debt grows.

This is why you should avoid making only the minimum payments unless you have absolutely no other choice and why knowing how interest rates accrue is one of the most important ways you can understand credit cards.

What is a Credit Limit?

Your credit limit is how much money you’re entitled to borrow from your bank at any given time. If you’re a new credit user, your limit will like fall somewhere between the $300 and $500 range. The longer you use your card (and the more responsible you are), the higher your credit limit can be.

It’s important to never go over your credit limit. Ideally, you should try to keep your spending to a cap of 30% of your limit. Depending on how low your limit is, that might not be possible, in which case, try to keep it below 70% of your limit.

If your credit limit is $1000.00, for example, you should try not to spend more than $300.00 (but realistically as long as you keep it below $700.00 you should be alright).

What is a Cash Advance?

A cash advance is one of the biggest traps your bank offers you and you should do your best to avoid it. By taking out a cash advance, you use your credit card like a debit card when you take money out of an atm or transfer money from your credit account into your chequing account. Unlike with a regular credit transaction, you’re automatically charged a cash advance fee regardless of how quickly you pay the money back (and you’re charged interest from the moment you receive the money).

What is a Billing Cycle and how Long does it Last?

Your billing cycle typically spans a month long period (around or just less than 30 days) and then you have something called a ‘grace period’ that gives you a minimum of 21 days to make your payment in full without being charged interest. If you only make the minimum payment, then you will be charged interest at the end of the grace period. If you make most of the payment but not the whole thing, you will still be charged interest for the original amount owed on your statement.

So let’s say your credit card statement comes in on the 1st of the month and you owe $500.00 due to be paid by the 22nd of the month – if you pay off the entire $500.00 before the due date, you won’t be charged any interest. If you pay $450.00 of the $500.00, you will still be charged interest, but it won’t just be for the remaining $50.00 – it will be for the original $500.00 sum.

Still not sure you really understand credit cards? You can book an appointment with us online right here.

Additional Reading:

The Approval Centre – Tips for Responsible Credit Card Use

The Approval Centre – Main Causes of Credit Card Debt (And How to Prevent Them)

TD – Credit Cards 101

Greedy Rates – The Dark Secret of the Credit Card Grace Period

RBC – Credit Card FAQs