How Do Credit Cards Work in Canada? A Complete Guide
Jul 5, 2024
Written by
Written by
Brianna Harrison (Credit Card & Travel Writer)
Brianna Harrison (Credit Card & Travel Writer)
Table of contents
Title
Title
Title
Credit cards can be a valuable financial tool to help you spread out payments, earn rewards, and build your credit score–but only if used wisely.
In this beginner’s guide to credit cards, you’ll learn everything you need to know about credit scores and how credit cards work, the different types of cards, what to look out for, and how to choose the best credit card for beginners.
How Do Credit Cards Work?
Credit cards allow you to borrow against a line of credit to make purchases, withdraw money from an ATM as a cash advance, and transfer balances from one card to another. Your credit card limit depends on your credit score. The average credit card limit in Canada for new cards ranges between $2,000 and $6,000.
The difference between your credit limit and balance is called your available credit. For example, if you have a credit card with a $2,000 limit and a balance of $500, your available credit would be $1,500.
If you carry a balance on your credit card, you’ll need to pay interest on it each month. This is called a variable APR.
There are different types of credit cards, including rewards, cashback, and travel credit cards. Some credit cards charge fees such as annual or monthly fees, foreign transaction fees, or balance transfer fees.
Keep reading to educate yourself so you can make the best decision possible when choosing your first credit card.
How Do Credit Card Interest Rates Work?
Interest rates depend on your bank and the type of transaction. Most credit card interest rates fall between 19.99% and 25.99%.
If you don’t pay your credit card balance by the due date, you’ll be charged interest until you pay it off in full. Your credit card statement should tell you the interest rates to pay and when your balance is due each month.
Most credit cards have the option for auto-pay, where you can automatically pay off the balance in full each month. This is recommended to keep your credit score high and avoid paying interest or late fees.
What Is a Credit Score and How Does it Work?
A credit score is a three-digit number between 300 and 900 derived from the information in your credit report. It tells lenders how well you manage credit and how risky a borrower you are.
Credit scores look like this:
Poor: 300-579
Fair: 580-669
Good: 670-739
Very good: 740-799
Excellent: 800+
What Makes Up Your Credit Score?
The five main factors that make up your credit score are:
Payment history – 35%
This includes information on how you repay credit, i.e., if you pay it on time, if you accrue interest, etc.
Used credit vs available credit – 30%
Your credit utilization ratio is the credit limit vs how much you’ve spent, and should be below 30%.
Credit history – 15%
This includes information on how long you keep credit accounts open and how you’ve handled them over the length of their existence.
Public records – 10%
If you have a history of bankruptcy or collection issues, this can negatively impact your credit score.
Credit inquiries – 10%
When applying for a new credit card or loan, lenders will perform a hard credit check. Too many credit inquiries will affect your credit score.
The two main credit bureaus in Canada, Equifax and TransUnion, collect information and store your credit history. You can check your credit score through them.
How to Build Your Credit Score
Follow these top tips to build your credit score slowly but surely:
Pay Off Your Balance
The number one thing you can do to build credit is pay off your credit card balance in full and on time each month. Payment history is the most important factor in determining your credit score, and timely payments help you get excellent credit.
Check Your Credit Report
Keep an eye on your credit score and report any inaccuracies. You should check your credit score every few months to ensure it’s only going up, not down. Some credit cards and banks allow you to check your credit score, but if not, you can check it with Equifax or TransUnion.
Keep Your Balance Low
Try to keep your credit utilization ratio below 30%. This means you should always stay below 30% of your credit limit to avoid a decrease in your credit score. For example, if your credit card has a $10,000 limit, try to keep the balance below $3,000 at all times.
Keep Accounts Open
Even if you no longer use old credit accounts, keeping them open can help boost your credit score. Don’t close your first credit card account.
Don’t Apply For Too Many New Credit Cards
It’s okay to apply for a few credit cards that allow you to earn different rewards, but don’t apply for too many new cards at once. Each new application for a credit card slightly impacts your credit score, so keep applications to a minimum.
Pay Rent With Your Credit Card
By incorporating rent payments on your credit report, you’re diversifying your credit mix and demonstrating a responsible payment history–all factors that can boost your credit score.
Companies like Chexy allow you to pay rent with your credit card. You not only earn travel rewards or cash back on your rent payments, but you can also build your credit with timely monthly rent payments.
All you need to do is opt into Chexy’s Credit Builder (which is completely free!), and your rent payments will be reported to Equifax.
How to Apply for a Credit Card
To apply for a credit card, you can visit a branch, apply online, or call your bank. You’ll need to meet the following requirements to be approved:
Be the age of majority
Be a Canadian citizen or resident
Have a credit history in Canada
Meet the minimum income requirement (if the credit card has one)
You must not have filed for bankruptcy in the past 7 years
You’ll need to submit some personal and financial details, including your full name, address, date of birth, employment information, and SIN (if applicable).
Here's a step-by-step guide on how to apply for a credit card in Canada.
Different Types of Credit Cards
There are many types of credit cards to suit everyone’s needs, from cashback and rewards cards to low-interest and no-annual-fee cards.
Cashback Credit Cards
Cashback cards pay you back a fixed percentage of what you spend. Depending on the card, you could earn more cashback on certain spending categories, and certain cards offer generous welcome bonus multipliers. Typically, cashback is paid out yearly or monthly.
Here are a few of the best cashback credit cards where you can earn up to 4% cashback on recurring payments, including rent:
Scotia Momentum Visa Infinite Card - earn 4% cash back on rent payments
TD Cash Back Visa Infinite Card - earn 3% cash back on rent and recurring bill payments
SimplyCash Preferred Card from American Express - earn 2% cash back on rent payments and everything else
Rewards Cards
Rewards credit cards earn you points for every dollar you spend. Certain spending categories can rack up more points, which can be used for travel vouchers, flights, merchandise, statement credits, and more.
Here are our top picks for the best rewards credit cards in Canada that are great for paying rent:
American Express Cobalt Card - earn 1 point for every $1 spent on rent
Scotiabank Gold American Express Card - earn 1 Scene+ point for every $1 spent on rent
American Express Aeroplan Reserve Card - earn 1.25 Aeroplan points for every $1 spent on rent
Business Credit Cards
Business credit cards are used by large or small businesses to consolidate all of their spending into one account. Generally, these cards have a higher credit limit and spend caps, and provide supplementary credit cards for employees.
No-Annual Fee Cards
No-annual fee credit cards don’t charge a monthly or yearly fee and are some of the best credit cards for beginners. They normally don’t have a super high credit limit or earn high rewards, but that’s the tradeoff for paying no fees.
Low-Interest Credit Cards
These credit cards have low interest rates, usually between 9% and 13%. They can be great for balance transfers and those who carry debt.
Secured Credit Cards
Secured cards are the best credit cards to build credit, especially if you have little to no credit history. These cards require a cash deposit, which acts as collateral every time you make a purchase. All monthly payments are reported to the credit bureaus.
Photo by Emil Kalibradov on Unsplash
Credit Card Fees to Look Out For
Every credit card issuer charges fees. Here’s what you should look out for:
Annual or Monthly Fees
Most credit cards charge an annual fee. Generally, the more high limit credit cards in Canada have higher monthly or yearly fees.
Interest
Every credit card has an interest rate for purchases, cash advances, and balance transfers, but it’s not always easy to spot. Interest rates can range from 19.99% to 25.99%, with many American Express credit cards charging an even higher APR.
Foreign Transaction Fees
FX fees occur when you use your credit card in a foreign country, typically outside of Canada. Foreign transaction fees sit around 2.5%.
Balance Transfer Fees
Some credit cards with the option to transfer your balance charge around 1% to 3% in fees.
Credit Cards vs Debit Cards
Everyone with a chequing account at a financial institution will likely have a debit card without applying for it. With a debit card, you can make purchases with the money available in your chequing account. You can even pay your rent with a debit card and build your credit while taking on no additional debt!
There are no interest fees or additional charges to use your debit card (unless your bank charges a monthly fee for your chequing account), and your credit score isn’t affected by your purchases.
You can borrow money up to a certain limit with a credit card, but you must pay it off in full or accrue monthly interest. Your credit score is highly impacted by your ability to spend under your limit and pay off the balance.
Pros and Cons of Credit Cards
As with most things, credit cards come with advantages and downsides which you must consider before applying for one.
Pros:
Flexibility: You have a month from when you make a purchase with your credit card to pay it off. This can help with your budget and give you a little bit more time to come up with the money.
Builds credit: Using a credit card responsibly and paying it off on time can help to build credit, which is important for borrowing more money in the future.
Credit card benefits: Most credit cards offer some kind of benefit, such as rewards points, cash back, or low interest rates. Some of the higher-tier credit cards even offer travel and purchase insurance.
Sign-up bonuses: Many credit cards offer generous bonuses, such as free rewards points or cash back, just for signing up.
Cons:
It can hurt your credit score: If you’re not careful and let the interest and balance rack up on your credit card or you miss a payment, this can negatively impact and lower your credit score.
It can increase your debt: If you don’t regularly pay off the entire balance of your credit card, you’ll accrue interest, which will only keep growing month after month.
Interest rates: All credit cards have an interest rate you’ll have to pay if you don’t fully pay off your balance each month.
Fees: Some credit cards have monthly or yearly fees, along with fees for balance transfer, foreign exchange, and cash advance fees.
How to Choose the Best Credit Card for Beginners
There are so many things to consider when choosing your first credit card. It can feel overwhelming, and you may not know where to start. Trust us–we’ve been there. Consider the following points for choosing a good starter credit card:
Compare all features: What rewards do you want to earn? Choose a cashback card to earn money on purchases or a travel credit card (like this one!) for free flights and travel upgrades.
Consider the fees: Decide if the annual fee is worth it and how much you’ll actually use the card. If there is a high interest rate, ensure you’re able to pay off the balance in full.
Look for promotional sign-up bonuses: Some credit cards offer high value in the first few months of using the card and will give you lots of extra points just for signing up.
Above all, choose the card that fits your lifestyle. If you’re looking for a good credit card to build your credit, go for a secured credit card. If you spend a lot of money on groceries, choose a card that offers a high cashback rate for that category.
Now, are you ready for your first credit card? The best first credit card should have no or low annual fees, no or low security deposit, and the ability to earn rewards or cash back.
Here are some tips on how to build your credit score as a newcomer to Canada and some of the best bank accounts to open.
Start paying rent with your credit card today. With Chexy, you can build your credit and earn rewards on your biggest monthly expense–rent. Reporting your rent payments helps you build credit a lot faster than simply using your credit card for everyday purchases.
Subscribe to our newsletter below for up-to-date credit card, travel, and rental content.
FAQs
What is the 2/3/4 rule for credit cards?
Some credit card issuers follow the 2/3/4 rule, meaning applicants can only apply for two credit cards in 30 days, three new cards in 12 months, and four new cards in two years.
When should you pay a credit card to avoid interest?
Ideally, you should pay your credit card balance in full by the due date on your monthly statement. This way, you’ll avoid having to pay interest.
What is credit card churning in Canada?
Credit card churning is a practice done by credit card experts and is not recommended for beginners. It involves applying for credit cards to earn the welcome bonus or other benefits and then closing the account. If you are not careful, this can negatively affect your credit score.
Credit cards can be a valuable financial tool to help you spread out payments, earn rewards, and build your credit score–but only if used wisely.
In this beginner’s guide to credit cards, you’ll learn everything you need to know about credit scores and how credit cards work, the different types of cards, what to look out for, and how to choose the best credit card for beginners.
How Do Credit Cards Work?
Credit cards allow you to borrow against a line of credit to make purchases, withdraw money from an ATM as a cash advance, and transfer balances from one card to another. Your credit card limit depends on your credit score. The average credit card limit in Canada for new cards ranges between $2,000 and $6,000.
The difference between your credit limit and balance is called your available credit. For example, if you have a credit card with a $2,000 limit and a balance of $500, your available credit would be $1,500.
If you carry a balance on your credit card, you’ll need to pay interest on it each month. This is called a variable APR.
There are different types of credit cards, including rewards, cashback, and travel credit cards. Some credit cards charge fees such as annual or monthly fees, foreign transaction fees, or balance transfer fees.
Keep reading to educate yourself so you can make the best decision possible when choosing your first credit card.
How Do Credit Card Interest Rates Work?
Interest rates depend on your bank and the type of transaction. Most credit card interest rates fall between 19.99% and 25.99%.
If you don’t pay your credit card balance by the due date, you’ll be charged interest until you pay it off in full. Your credit card statement should tell you the interest rates to pay and when your balance is due each month.
Most credit cards have the option for auto-pay, where you can automatically pay off the balance in full each month. This is recommended to keep your credit score high and avoid paying interest or late fees.
What Is a Credit Score and How Does it Work?
A credit score is a three-digit number between 300 and 900 derived from the information in your credit report. It tells lenders how well you manage credit and how risky a borrower you are.
Credit scores look like this:
Poor: 300-579
Fair: 580-669
Good: 670-739
Very good: 740-799
Excellent: 800+
What Makes Up Your Credit Score?
The five main factors that make up your credit score are:
Payment history – 35%
This includes information on how you repay credit, i.e., if you pay it on time, if you accrue interest, etc.
Used credit vs available credit – 30%
Your credit utilization ratio is the credit limit vs how much you’ve spent, and should be below 30%.
Credit history – 15%
This includes information on how long you keep credit accounts open and how you’ve handled them over the length of their existence.
Public records – 10%
If you have a history of bankruptcy or collection issues, this can negatively impact your credit score.
Credit inquiries – 10%
When applying for a new credit card or loan, lenders will perform a hard credit check. Too many credit inquiries will affect your credit score.
The two main credit bureaus in Canada, Equifax and TransUnion, collect information and store your credit history. You can check your credit score through them.
How to Build Your Credit Score
Follow these top tips to build your credit score slowly but surely:
Pay Off Your Balance
The number one thing you can do to build credit is pay off your credit card balance in full and on time each month. Payment history is the most important factor in determining your credit score, and timely payments help you get excellent credit.
Check Your Credit Report
Keep an eye on your credit score and report any inaccuracies. You should check your credit score every few months to ensure it’s only going up, not down. Some credit cards and banks allow you to check your credit score, but if not, you can check it with Equifax or TransUnion.
Keep Your Balance Low
Try to keep your credit utilization ratio below 30%. This means you should always stay below 30% of your credit limit to avoid a decrease in your credit score. For example, if your credit card has a $10,000 limit, try to keep the balance below $3,000 at all times.
Keep Accounts Open
Even if you no longer use old credit accounts, keeping them open can help boost your credit score. Don’t close your first credit card account.
Don’t Apply For Too Many New Credit Cards
It’s okay to apply for a few credit cards that allow you to earn different rewards, but don’t apply for too many new cards at once. Each new application for a credit card slightly impacts your credit score, so keep applications to a minimum.
Pay Rent With Your Credit Card
By incorporating rent payments on your credit report, you’re diversifying your credit mix and demonstrating a responsible payment history–all factors that can boost your credit score.
Companies like Chexy allow you to pay rent with your credit card. You not only earn travel rewards or cash back on your rent payments, but you can also build your credit with timely monthly rent payments.
All you need to do is opt into Chexy’s Credit Builder (which is completely free!), and your rent payments will be reported to Equifax.
How to Apply for a Credit Card
To apply for a credit card, you can visit a branch, apply online, or call your bank. You’ll need to meet the following requirements to be approved:
Be the age of majority
Be a Canadian citizen or resident
Have a credit history in Canada
Meet the minimum income requirement (if the credit card has one)
You must not have filed for bankruptcy in the past 7 years
You’ll need to submit some personal and financial details, including your full name, address, date of birth, employment information, and SIN (if applicable).
Here's a step-by-step guide on how to apply for a credit card in Canada.
Different Types of Credit Cards
There are many types of credit cards to suit everyone’s needs, from cashback and rewards cards to low-interest and no-annual-fee cards.
Cashback Credit Cards
Cashback cards pay you back a fixed percentage of what you spend. Depending on the card, you could earn more cashback on certain spending categories, and certain cards offer generous welcome bonus multipliers. Typically, cashback is paid out yearly or monthly.
Here are a few of the best cashback credit cards where you can earn up to 4% cashback on recurring payments, including rent:
Scotia Momentum Visa Infinite Card - earn 4% cash back on rent payments
TD Cash Back Visa Infinite Card - earn 3% cash back on rent and recurring bill payments
SimplyCash Preferred Card from American Express - earn 2% cash back on rent payments and everything else
Rewards Cards
Rewards credit cards earn you points for every dollar you spend. Certain spending categories can rack up more points, which can be used for travel vouchers, flights, merchandise, statement credits, and more.
Here are our top picks for the best rewards credit cards in Canada that are great for paying rent:
American Express Cobalt Card - earn 1 point for every $1 spent on rent
Scotiabank Gold American Express Card - earn 1 Scene+ point for every $1 spent on rent
American Express Aeroplan Reserve Card - earn 1.25 Aeroplan points for every $1 spent on rent
Business Credit Cards
Business credit cards are used by large or small businesses to consolidate all of their spending into one account. Generally, these cards have a higher credit limit and spend caps, and provide supplementary credit cards for employees.
No-Annual Fee Cards
No-annual fee credit cards don’t charge a monthly or yearly fee and are some of the best credit cards for beginners. They normally don’t have a super high credit limit or earn high rewards, but that’s the tradeoff for paying no fees.
Low-Interest Credit Cards
These credit cards have low interest rates, usually between 9% and 13%. They can be great for balance transfers and those who carry debt.
Secured Credit Cards
Secured cards are the best credit cards to build credit, especially if you have little to no credit history. These cards require a cash deposit, which acts as collateral every time you make a purchase. All monthly payments are reported to the credit bureaus.
Photo by Emil Kalibradov on Unsplash
Credit Card Fees to Look Out For
Every credit card issuer charges fees. Here’s what you should look out for:
Annual or Monthly Fees
Most credit cards charge an annual fee. Generally, the more high limit credit cards in Canada have higher monthly or yearly fees.
Interest
Every credit card has an interest rate for purchases, cash advances, and balance transfers, but it’s not always easy to spot. Interest rates can range from 19.99% to 25.99%, with many American Express credit cards charging an even higher APR.
Foreign Transaction Fees
FX fees occur when you use your credit card in a foreign country, typically outside of Canada. Foreign transaction fees sit around 2.5%.
Balance Transfer Fees
Some credit cards with the option to transfer your balance charge around 1% to 3% in fees.
Credit Cards vs Debit Cards
Everyone with a chequing account at a financial institution will likely have a debit card without applying for it. With a debit card, you can make purchases with the money available in your chequing account. You can even pay your rent with a debit card and build your credit while taking on no additional debt!
There are no interest fees or additional charges to use your debit card (unless your bank charges a monthly fee for your chequing account), and your credit score isn’t affected by your purchases.
You can borrow money up to a certain limit with a credit card, but you must pay it off in full or accrue monthly interest. Your credit score is highly impacted by your ability to spend under your limit and pay off the balance.
Pros and Cons of Credit Cards
As with most things, credit cards come with advantages and downsides which you must consider before applying for one.
Pros:
Flexibility: You have a month from when you make a purchase with your credit card to pay it off. This can help with your budget and give you a little bit more time to come up with the money.
Builds credit: Using a credit card responsibly and paying it off on time can help to build credit, which is important for borrowing more money in the future.
Credit card benefits: Most credit cards offer some kind of benefit, such as rewards points, cash back, or low interest rates. Some of the higher-tier credit cards even offer travel and purchase insurance.
Sign-up bonuses: Many credit cards offer generous bonuses, such as free rewards points or cash back, just for signing up.
Cons:
It can hurt your credit score: If you’re not careful and let the interest and balance rack up on your credit card or you miss a payment, this can negatively impact and lower your credit score.
It can increase your debt: If you don’t regularly pay off the entire balance of your credit card, you’ll accrue interest, which will only keep growing month after month.
Interest rates: All credit cards have an interest rate you’ll have to pay if you don’t fully pay off your balance each month.
Fees: Some credit cards have monthly or yearly fees, along with fees for balance transfer, foreign exchange, and cash advance fees.
How to Choose the Best Credit Card for Beginners
There are so many things to consider when choosing your first credit card. It can feel overwhelming, and you may not know where to start. Trust us–we’ve been there. Consider the following points for choosing a good starter credit card:
Compare all features: What rewards do you want to earn? Choose a cashback card to earn money on purchases or a travel credit card (like this one!) for free flights and travel upgrades.
Consider the fees: Decide if the annual fee is worth it and how much you’ll actually use the card. If there is a high interest rate, ensure you’re able to pay off the balance in full.
Look for promotional sign-up bonuses: Some credit cards offer high value in the first few months of using the card and will give you lots of extra points just for signing up.
Above all, choose the card that fits your lifestyle. If you’re looking for a good credit card to build your credit, go for a secured credit card. If you spend a lot of money on groceries, choose a card that offers a high cashback rate for that category.
Now, are you ready for your first credit card? The best first credit card should have no or low annual fees, no or low security deposit, and the ability to earn rewards or cash back.
Here are some tips on how to build your credit score as a newcomer to Canada and some of the best bank accounts to open.
Start paying rent with your credit card today. With Chexy, you can build your credit and earn rewards on your biggest monthly expense–rent. Reporting your rent payments helps you build credit a lot faster than simply using your credit card for everyday purchases.
Subscribe to our newsletter below for up-to-date credit card, travel, and rental content.
FAQs
What is the 2/3/4 rule for credit cards?
Some credit card issuers follow the 2/3/4 rule, meaning applicants can only apply for two credit cards in 30 days, three new cards in 12 months, and four new cards in two years.
When should you pay a credit card to avoid interest?
Ideally, you should pay your credit card balance in full by the due date on your monthly statement. This way, you’ll avoid having to pay interest.
What is credit card churning in Canada?
Credit card churning is a practice done by credit card experts and is not recommended for beginners. It involves applying for credit cards to earn the welcome bonus or other benefits and then closing the account. If you are not careful, this can negatively affect your credit score.