Credit Card 101 How Does It Work

Do you really know how your credit card works? Interest calculation, minimum monthly payment, credit limit, annual fees: there are several things you need to know to get the most out of it. These tips will help you use it wisely.

What is the interest on a credit card? 

The interest rate charged on purchases you make is calculated using an annual rate. To find out how much interest you’ll pay, divide it by 365 days. For example, for an interest rate of 20.99%, the daily rate is 0.0575%. 

How is credit card interest calculated? 

Calculating interest on your purchases 

If you pay your balance in full by the due date on your monthly statement, you will not be charged interest on your purchases. Otherwise, interest is charged on the day of the transaction and will be added to your balance on your next statement. For example , if you made a purchase 15 days ago, your daily interest rate applies to those 15 days, not from the due date to pay your balance.  Even if you have paid part of the balance, be aware that until it is fully repaid, you will have to pay interest on the total of your purchases, always calculated from the date each transaction was made.  

Calculating interest on cash advances 

Your credit card also allows you to withdraw money or make transactions such as a bank transfer or check. This is called a cash advance. In this case, there is no grace period, and interest begins to apply from the time of the transaction until you repay the full amount.  Good to know Cash advances generally charge a higher interest rate. Check your credit card agreement for terms and conditions.

How do refunds and minimum payments work? 

If you are unable to pay off your credit card balance in full, you will still be required to make a minimum monthly payment due .  For Canadian residents, excluding Quebec , it varies from bank to bank and is generally around 3% of the total balance.   In Quebec , for credit cards issued after August 1, 2019, the minimum payment is 5% of the total balance (purchases, interest, fees, etc.) or $10 minimum, whichever is higher. For cards issued before this date, the percentage has been 3.5% since August 1, 2022, and will gradually increase by an additional 0.5% per year, up to 5% in 2025.Reminder : To avoid interest, pay off your entire balance by the due date on your monthly statement, not just the minimum payment. 

What is a credit limit and how do I determine it? 

Your limit sets the maximum amount you can use on your credit card. It is set by your financial institution based on, among other things, your credit history. Some cards have minimum credit limits.

You can accept the maximum limit offered to you or opt for a lower limit. Consider these two factors to determine what the right limit is for you: 

• Your credit score . Ideally, you shouldn’t use more than 30% to 35% of your available credit. If your balance climbs too high, above 50%, it will have a negative impact on your credit score. Remember that your credit limit should be high enough to allow you to use your card optimally without getting too close to it.  
• Your finances . Your credit limit should be within your monthly budget . If it exceeds it, make sure you have good discipline so you can always pay off your balance. 

To make the right choice, find a balance between, on the one hand, a limit high enough that you don’t get too close to it when you use your card, and on the other, an amount that respects your financial means. 

How can a credit card affect your credit report? 

While credit cards aren’t essential for building a credit history, they can weigh heavily on your credit score. Used responsibly, they can help build and improve your credit history, while conversely, they can harm it.  

To build a solid credit history and a good credit score, always make your minimum payments on time and keep your balance within a reasonable limit.  

What are the annual fees for a credit card? 

Some credit cards have fees that will be charged annually to your statement. Their amount varies, and they may also be waived during a promotional period. Keep in mind that cards with annual fees usually offer benefits in return, allowing you to get more value for your money. 

What is a rewards or cashback program? 

Some credit cards offer a rewards program. You can earn points every time you use your card to make purchases. You can then redeem these points for rewards such as products, services, travel, or even cash.   What varies from one rewards program to another is the number of points awarded for each purchase and their value when redeemed for rewards. For example, a grocery store purchase might be worth three times its point value, while a clothing store purchase might only be worth one time its point value.   Other cards offer cashback instead. Instead of earning points, users receive cashback, which is usually a percentage of purchases made with the card. This cashback can be credited directly to the credit card balance, deposited into a bank account, or another dedicated cashback account.  Read the rewards program terms carefully before signing up to fully understand how it works and how to get all the benefits.

How do the different insurances offered by your card work? 

Some credit cards also offer other benefits, such as insurance related to purchases you make with them.  

Here are some examples

• Insurance on your purchases. It protects against theft and certain damages. Many cards also extend the warranties offered by manufacturers. 
• Mobile Device Insurance. It protects your mobile device in case of accidental breakage, loss or theft. 
• Travel cancellation insurance. It reimburses certain travel expenses paid with your card (plane tickets, hotel reservations or car rental) in the event of cancellation. 
• Baggage delay, theft, or loss insurance. It provides compensation if the delivery of your baggage is delayed, lost or stolen. 
• Travel medical insurance. You benefit from medical coverage abroad for a trip of limited duration. 
• Car rental insurance. You have car insurance coverage on the vehicle rented with your card.

How to choose the right credit card? 

You should choose your card based on your needs and lifestyle.  

Here are some additional factors to consider: 

• Eligibility criteria (such as minimum income) 
• Annual fees 
• Insurance, guarantees and other benefits offered (such as VIP lounges at the airport) 
• Rewards and cashback programs 
• Options for using your reward points 
• Interest rates 

Remember that a credit card shouldn’t be a source of debt, but rather a convenient payment tool, especially for online purchases. It’s also very useful for making hotel reservations or renting a car, for example. If you need financing, there are other options like a personal line of credit , which usually has lower interest rates than credit cards.