Perhaps you’ve just acquired your first credit card, or you’re currently in search of one. Regardless of the situation, gaining an in-depth understanding of credit cards, how they operate, and the industry jargon associated with them is a financially savvy decision for your future.
The right credit card can help you finance significant purchases while building your credit history, a component that reflects your financial management skills and demonstrates to insurers whether they can trust you for loans, such as for a car or house purchase, among others, or for obtaining credit cards.
Vocabulary
There are several key terms related to credit cards that you will frequently encounter. It is important to familiarize yourself with the following:
- Annual fee: An annual fee charged by the credit card issuer for the card’s usage and the benefits it provides.
- Credit score: A three-digit number representing the risk the lender takes when lending you money. It indicates the likelihood of you repaying the debt. Lenders use this number to decide whether to approve your loan. The higher your credit score, the lower the risk for the lender.
- Credit report: A report from a credit agency showing your credit activity and how you manage your finances.
- Credit history: Your ability to repay debts on time.
- Signup bonus: An incentive provided by the credit card issuer for signing up and completing a task, such as spending a specific amount within a set timeframe.
- Purchase interest rate: The interest rate applied to purchases if you do not pay the full balance by the due date.
- Cash advance: A service provided by your bank that allows you to withdraw money from an ATM or bank branch based on your credit limit. The interest rate is higher, and the issuer also charges a cash advance fee per transaction.
- Balance transfer: The process of transferring debt or balances from one credit card to another.
- APR (Annual Percentage Rate): The annual interest rate charged by the lender for borrowing money.
Types of credit cards in Canada
When it comes to credit card rewards, the name says it all. These cards reward you when you spend, be it with points, miles, or cash. The more you spend, the more rewards you receive. For those who pay their full balance each month, these cards can be a real boon. There are different types of reward cards:
- Cashback credit cards: These cards reimburse a percentage of the amount spent on purchases, which can be redeemed as a check, statement credit, or deposited into your account. The cashback percentage can range from 1% to 6% and can be fixed, variable, or rotating.
- Travel credit cards: These cards reward you with points or miles for every dollar spent, which can be redeemed for flights, hotels, and travel-related expenses. They generally do not have a currency conversion fee, saving frequent international travelers significant costs.
- Airline credit cards: Linked to specific airlines, these credit cards allow you to redeem points for airfare and ticket upgrades, along with benefits such as free checked bags and priority boarding.
- Hotel credit cards: Offering free nights and room upgrades at specific hotel chains.
- Balance transfer credit cards: Designed for individuals with balances on high-interest credit cards, these cards help consolidate such debt and, with interest rates ranging from 0% for a few months to a year, can significantly reduce your debt without spending money on interest.
- Student credit cards: Specifically designed for students, who usually have little or no credit history and may not meet income requirements, these cards typically have no annual fee.
- Secured credit cards: Individuals with poor credit scores or limited local credit history often struggle to get approved for credit cards. Secured cards can offer a solution, as they are “secured” with a deposit by the applicant, and nearly anyone can be approved. Responsible use of a secured card can help build or rebuild your credit score.
How to decide which is best?
To choose the best credit card for you, assess your priorities. If you typically carry a high balance or want to reduce your debt, consider a low-interest balance transfer card. If not, travel cards may offer lucrative rewards, but depending on the points system, a cashback card might be more advantageous.
Also, consider the annual fee, ensuring that the value of the rewards and benefits outweighs the fee. Ultimately, decide between cashback or travel cards based on your needs and spending habits. Remember that cashback is simpler and has no travel restrictions.
Conclusion
Having two or three credit cards to consolidate expenses and maximize benefits can be ideal. For example, use one card for general purchases and another for specific expenses, such as gasoline and monthly bills. This way, you can optimize your return.