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A credit card user displays her cards in Washington February 22, 2010. (KEVIN LAMARQUE/REUTERS/Kevin Lamarque (UNITED STATES))
A credit card user displays her cards in Washington February 22, 2010. (KEVIN LAMARQUE/REUTERS/Kevin Lamarque (UNITED STATES))

Managing Debt

How credit cards work Add to ...

What you need to know about credit cards – including what credit card companies can and can’t do, and what information they have to give you.

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 can’t do, and about the information they must include on your monthly statement.

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8 things to know about your credit card

  1. Annual fee – If your credit card charges an annual fee, ask the lender if they’ll waive it. They may be willing to do this to keep your business.
  2. Balance due – Your statement will tell you what you owe and when it’s due. The amount due 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 can’t change this limit without letting you know.
  4. Finance charges – If you don't pay your bill on time, these charges can include late fees plus interest. You’ll likely pay a higher rate of interest on any cash you borrow using your card and a lower rate on money you borrow for purchases. Your credit card company treats these as 2 different kinds of balances.
  5. Grace period – This is the time you have to pay off the balance you owe each month before you 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 lender must give you a grace period of at least 21 days on all new purchases. If you don’t, you’ll pay interest on the full amount you owe.
  6. Annual percentage rate (APR) – This includes all loan service costs and interest. It may be higher than the interest rate you see in the loan contract.
  7. Introductory rate – This is a special offer that gives you a temporary, lower APR. In most cases, the offer lasts about 6 months. Then it goes up to the normal rate for your type of card. Your lender must tell you in advance when interest rates are going to increase.
  8. Minimum monthly payment – Most cards ask only for a minimum payment each month. This is often 5% of the current balance or $10, whichever is more. Your monthly statement will tell you how long it will take to fully repay what you owe if you only make the minimum payment each month.

Making the minimum payment

It can take several years to pay off your credit card by making the minimum monthly payment. For example, say you owe $4,000 on your credit cards. The interest rate is 18%. If your minimum monthly payment is $200 – or 5% – it will take you about 2 years to get out of debt. And you’ll end up spending $800 in interest. Use this calculator to find out how long it will take you to pay off your debt.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca


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