We all get them in the mail: those endless offers from companies who are only too happy to give you a credit card. And with low interest for six months, no payments for 3 months... you can buy stuff today and let someone else pay for it for a while. Who wouldn’t like that!
Used wisely, a credit card can be a very convenient way to shop. As a bonus, it allows you to make purchases with nearly a month to pay for them before finance charges kick in.
But buyers beware. Those little plastic cards can get you into trouble. It's easy to overspend. Minimum payments are low. The debt can creep up on you slowly.
Not only that. Whenever you use your credit card to shop, the store pays, too. They pay the credit card network (in most cases, Visa or MasterCard). They also pay the company that processes the payments. The costs add up to two to four per cent of the amount you charged to your card.
Guess who they pass these costs on to? You, the consumer. The store may cover these credit costs by charging higher prices. Even if you don't use a credit card when you shop there, you may still be paying for the privilege. In fact, it would be hard to avoid doing so. More than 90 per cent of stores in Canada accept credit cards. (Source: Bank of Canada, 2008)
So before you put another piece of plastic in your wallet, make sure you know what you’re really signing up for - and, what it's really going to cost you.
Did you know? All VISA card numbers start with the number 4. For MasterCard, it's number 5.
When you sign up for a credit card, you agree to certain charges, terms and conditions. There are also rules about what credit card companies can and cannot do - and, rules about the information they must include on your monthly statement. Many of these rules have changed since 2009.
Here are the top seven things you need to know about your card:
1. Annual fee.
Some cards come with a flat, yearly charge that's like a membership fee. Others have no yearly fee. These cards may charge a higher interest rate. To learn more, read Finding the right credit card deal: Sundaram's story. Tip: If your credit card has a yearly fee, ask the lender if they will waive this charge. They may be willing to do this just to keep your business.
2. Balance due.
This is the amount you must pay each month on time to avoid interest charges. Your statement will tell you what you owe and when it is due. It can include any unpaid balance you owe from a previous bill, as well as any new charges, interest, late fees or annual fees.
3. Credit limit.
This is the amount you can borrow using your card. The lender cannot change this limit without letting you know.
4. Finance charges.
If you don't pay off your balance due on time, these charges can include late fees plus interest. You will likely pay a higher rate of interest on any cash you borrow using your card and a lower rate on money you borrow for store purchases. Your credit card company treats these as two different kinds of balances. Tip: When you make a payment, your credit card company must apply the money either to the amount you owe with the higher interest rate, or across all types of balances. They can't apply all of your payment to the balance with the lowest interest rate.
5. Grace period.
This is the time you have to pay off the balance you owe each month before you will have to pay interest. In most cases, the grace period starts on the billing date and ends a certain number of days after. Under Canadian rules, if you pay off your balance in full each month, your card company must give you a grace period of at least 21 days on all new card purchases. You will lose your grace period if you do not pay off your balance due each month. You will also be charged interest on the total balance you owe starting from that month's due date, including throughout the grace period, until you pay off your balance.
Tip: There is no grace period to pay off cash advances. To regain your grace period, you must pay off everything you owe on your card by the next due date Tip: Grace periods from credit unions and finance companies may be shorter because these institutions do not have to follow Canadian rules. They follow provincial rules instead. There is no grace period at all for cash advances. Longer grace periods are better because they give you more time to pay off your credit card balance and avoid interest charges.
6. Annual percentage rate (APR).
This is the yearly percentage rate of the finance charge.
7. Introductory rate.
This is a special offer that gives you a temporary, lower APR. In most cases, the offer lasts for about six months. Then it goes up to the normal rate for your type of card. Your card company must tell you in advance when interest rates are going to increase - even if the information is part of your contract. When you have a credit card, you will receive a monthly statement showing you what you owe and the date your payment is due. Your statement must also tell you how long it will take you to fully repay what you owe if you only make the minimum payment each month. Many people do not understand the high cost of paying only the minimum payment. To learn more, read How much does that expensive gift really cost? Luc's story
Remember: It pays to understand how your credit card works.
Before you choose a card, shop around. Interest rates vary from card to card. So do the terms and conditions. You can save money by picking a card that best matches your spending habits.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.