How do credit cards work?

Credit cards are part of a lot of people’s (sometimes virtual) wallets. Along with being convenient, using a credit card wisely can also build your credit score and history, which is useful when you apply for other credit in the future. 

Here's how credit cards work and what you need to know before adding one to your wallet.

While credit cards and debit cards look very similar and can help you pay for things, there is a huge difference. Debit cards are connected directly to your bank account and purchases are deducted from your balance – this means that the money is taken from your bank account right away. 

While some chequing accounts might have a monthly maintenance fee, using your debit card is typically fee-free as long as you are not going into your account’s overdraft or exceeding the account’s maximum number of transactions.

Credit cards allow you to borrow money for a purchase and you, as the borrower, will need to repay this amount in full by the due date on your monthly statement or you will pay interest on your purchase at the annual interest rate that applies to those purchases. By applying for a credit card, you agree to the card's terms, which includes the interest rate that applies on balances not paid by the monthly due date. 

Credit cards also have a grace period, which is the period of time between the purchase and when the payment is due. You will have an “interest-free” grace period on new purchases made on your credit card if you pay your balance in full on time.  Note: cash advances do not have an interest-free grace period (you pay interest on a cash advance rate that applies to them from the date of your cash advance transaction). 

If you cannot pay the entire outstanding balance of your credit card each month by the due date, you are required to pay at least the minimum payment on your monthly statement by the due date to keep your credit score healthy.

Always review the interest rates that apply to your credit card on purchases before you decide to use a credit card vs. a debit card to make a payment and consider the time that it will take you to repay your credit card. 

Along with interest charges, most credit cards have other fees, too:

• Balance transfer fees: Sometimes it is helpful to transfer another credit card balance to a credit card with a promotional 0% interest rate on balance transfers to pay off debt quicker, but you can expect to pay a percentage on the amount that you transfer. For example, if you wanted to transfer $2,000 of credit card debt to a 0% interest rate promotional rate offer you can expect to pay a fee on that offer that can range from different percentages (for example) 2-3% in fees) which in the case of the $2000 offer would result in a fee of $40 to $60.
• Foreign transaction fees: If you use your card for a transaction outside of Canada or to purchase an item in a different currency, you may be charged a foreign currency conversion fee. Some travel cards – like the Scotiabank PassportTM Visa Infinite* card – may not apply a foreign currency conversion fee (only the exchange rate applies).**  
• Annual fees: Some cards have an annual fee – that could be because the card may have cash back or other rewards and cardholder benefits.  Make sure that the benefits and annual rewards will outweigh the annual fee.
• Over limit fees: if your balance that is owed exceeds your credit limit, a fee may be charged. 

There are different categories of credit cards you can apply for. Here are five of the most common types of credit cards you can consider: 

• Rewards credit cards: These cards offer incentives for certain uses and sometimes cardholders will receive higher rewards for specific spending categories, such as travel. Rewards can include things like cash back or points. Often these cards can have a higher annual fee or some of these cards may have no annual fee. 
• Balance transfer credit cards: Cards that allow cardholders to transfer their debt at a lower promotional interest rate (sometimes for a specified period of time). 
• Student credit cards: Student credit cards often have lower credit limits and easier credit requirements to meet.
• Small business credit cards: These cards come with features and benefits directed towards business use, such as f cash back towards business expenses and telecommunication expenses or customized reporting
• Retail credit cards: Certain issuers will offer credit cards that can be used in a store or chain of stores as well as outside of those stores

A secured credit card may require you to provide a form of “security” - usually in the form of a cash deposit that is at least for the same amount as your credit limit. There are a few potential benefits of secured credit cards, including using one to build or improve your credit history if you have low verifiable income, no credit history or a poor credit score. Secured cards do not have to be used forever, you can apply to move to an unsecured card and move to an unsecured card if you are approved. 

An unsecured credit card is a card that does not require any security. It is the most common type of credit card and is usually what a cardholder applies for at financial institutions like Scotiabank or through other lenders (credit unions, trust companies).  

For store credit cards – please remember that the issuer of the card is not the retailer, but a lender. Same is true for credit cards affiliated with a college or university.   

Whether you are looking for a cash back or other rewards with your credit card or you need to boost your score with a secured card, Scotia advisors will help you compare which credit cards may work best for you.