Rounding it up
Both credit cards and debit cards are fantastic financial tools for new Canadian residents.
Debit cards are electronic payment tools that allow you to use money that you have in the bank for daily purchases.
You can think of credit cards as a type of mini loan for your purchases that you have to pay off each month.
New residents in Canada often find that it’s easier and more practical to get a debit card first because you need a good credit history to get a credit card.
As a new Canadian resident, you have your work cut out for you when it comes to managing your finances. Regardless of what your financial situation was before you immigrated, you’ve probably found that banking is different in Canada. This can make it tricky to determine the best way to handle your money.
One of the most common questions we hear from new residents in Canada is whether you should get a credit card or a debit card for your daily purchases.
The reality is that you’ll likely end up with both a credit card and a debit card as you start your new life in Canada. But most newcomers find that it’s easier and more practical to start with a debit card and to hold off on applying for a credit card until a little later down the line.
Either way, deciding whether to open a debit or a credit card isn’t always easy. That’s why we’re taking a look at the pros and cons of each option so that you can make the best decisions for your financial life.
Before we get into the nitty-gritty details as to whether you should get a debit or a credit card, let’s first look at the differences between these two payment methods.
What is a debit card?
A debit card, or bank card, is a type of electronic payment system that deducts money from your bank account whenever you make a purchase. You can also use a debit card to retrieve cash from an ATM.
The idea is that you give a merchant or ATM permission to withdraw funds from your chequing account to pay for goods or services. That merchant or ATM then enters your debit card details into a payment system that automatically debits your account for the total cost of your purchase. If you don’t have money in your account, the transaction won’t process. It’s as simple as that.
Debit cards are popular financial tools because they make it easy to purchase goods and services without cash. In a society that’s becoming rapidly cashless, getting a debit card is a must for all newcomers to Canada. In fact, you’ll often get issued a debit card automatically when you open a Canadian chequing account.
There are actually multiple types of debit cards out there, each of which has its own advantages and disadvantages. In Canada, the two primary types of debit cards include:
Standard debit cards – These cards are directly linked to your chequing account. They allow you to spend as much money as you have in your account. Standard debit cards provide you with quick and easy access to your money without the need for cash.
Prepaid debit cards – Prepaid debit cards are very similar to standard debit cards but with a twist: You can control how much money you have available to spend at any given time. For example, if you have a budget of $500 for the week, you can load that amount onto your card. Doing so makes it impossible to spend more than you want at a given time. This makes a prepaid debit card a powerful budgeting tool.
KOHO’s reloadable prepaid Mastercard card works in a similar way to the prepaid debit cards, except you get cool credit card perks like cash back! Keep in mind that many debit cards are what we call “co-badged.” This means that they have the logo of a payment processing service, such as Visa or Mastercard, on the card.
Although Visa and Mastercard are two major credit card processing systems, having their logo on your debit card doesn’t turn it into a credit card. Rather, these cards simply use the Visa or Mastercard network to allow you to make debit card payments at a variety of retailers around Canada and the world.
What is a credit card?
On the face of it, credit cards look a whole lot like debit cards. They’re both plastic cards that you can carry around and use for daily purchases.
However, credit cards differ from debit cards in one major way: Credit cards allow you to make purchases with money you don’t already have using a line of credit. Effectively, credit cards are a revolving line of credit that you can use whenever you want to borrow money.
To use a credit card, you simply need to present your card when you want to make a purchase. The cost of your purchase is then added to your credit account without automatically removing any funds from your bank account. It’s like free money... right?
Well, no. The catch with credit cards is that you do have to pay back all of the money you borrow for your purchases, even if that money isn’t taken from your chequing account right away. If you pay off the balance of your credit card each month, you simply have to pay the cost of the goods that you purchased. If you don’t pay your balance in full, you’ll also have to pay interest—and a lot of it.
Interest-bearing credit cards can sound scary, but the reality is that they’re very powerful financial tools. When used responsibly, credit cards offer a number of perks that you often can’t get elsewhere, like cash back and airline rewards.
The trick with credit cards is to use them responsibly and with the full knowledge that you need to pay your balance off in full each month. Of course, emergencies happen and sometimes you might need to carry a balance on your card. But this type of borrowing should be the exception, not the rule.
Key differences between debit & credit cards
Now that you know the basics behind Canadian debit and credit cards, let’s take a look at some of the key differences between debit and credit cards in Canada for new residents. In this section, we’ll focus on various aspects of credit and debit card usage in Canada that you ought to know before deciding which option is best for you.
Ease of access
When we talk about access in banking and financial services, like debit and credit cards, we’re referring to how easy it is for Canadians to be able to open these types of accounts.
In Canada, debit cards are one of the more accessible financial tools. That’s because nearly anyone with a chequing account in Canada is eligible to get a debit card for daily payments.
In many cases, your bank will issue you with a debit card as soon as you open a chequing account. This is particularly true if you open a bank account with a financial institution that offers special services for newcomers to Canada. These banks will normally give you a debit card, chequebook, and other similar tools when you open an account.
Credit cards, however, are a bit more difficult to acquire. In Canada, you generally need to have a strong credit score in order to apply for a credit card. A credit score is a numerical value that’s based on your credit history, which tells banks whether you’re trustworthy enough to be granted a loan.
The issue is that the credit history you had before you immigrated to Canada won’t follow you to your new home. You basically start from scratch when you start your new life as a resident in the country. That can make it difficult to get a credit card as a newcomer.
Thankfully, many banks now offer credit cards to new residents as part of their special packages for newcomers. Just make sure that you understand the terms and conditions of your new card before you open an account.
Cash flow in credit and debit card terms refers to the source of the money that you use to make daily purchases.
With debit cards, as we've mentioned, the money you spend comes directly out of your chequing account. With few exceptions, you can’t spend more money with a debit card than you have in your account at any given time.
Credit cards use an entirely different cash flow system. With a credit card, your financial institution sets a monthly limit (known as a credit limit) on how much you can borrow each month. You can then spend as much of that money as you’d like, but you will eventually need to pay back those funds—sometimes with interest.
Payment & withdrawal limits
Regardless of whether you use a debit or credit card, you will find that there are limits on how much you can spend on your cards in a given time period.
Most debit cards have either a daily, weekly, or monthly spending limit. This is usually for consumer protection purposes so that fraudsters can’t access an unlimited amount of money if they get their hands on your banking information. Your KOHO prepaid Mastercard also lets you limit how much money you have on your card at any given time to help you budget effectively.
Alternatively, nearly all credit cards have a credit limit. This refers to how much you can borrow on your card each month. Credit limits vary based on your creditworthiness and on the lender’s risk tolerance. You can expect a credit limit of anywhere from $250 to $10,000 or more on a credit card.
Interest rates & fees
Banks are in the business of making money, so it should come as no surprise that there are fees involved with using credit and debit cards.
With debit cards, fees tend to be relatively minimal, but they do exist. The most common fees you’ll pay with a debit card include overdraft fees and ATM fees. You can often avoid overdraft fees by keeping an eye on your chequing account balance. ATM fees can be avoided if you use in-network ATMs.
Credit card fees can be very complex. The most important fee to keep in mind is your interest rate. This rate is charged on any balance you have on your card. You can avoid interest fees if you pay off your balance each month.
Other potential fees include monthly or annual fees, foreign transaction fees, and cash advance fees. Check with your card issuer to see how you can avoid these fees before you start using your card.
Rewards & perks
These days, many financial institutions offer rewards and perks for using their services. Credit and debit cards are no exception.
As a general rule, you’ll find more rewards and perks when using certain credit cards. Potential bonuses for using these cards include free cash back and airline miles for every dollar you spend. Some cards also offer discounts at certain merchants, though they often come with higher interest rates or an annual fee.
Rewards and perks are less common with debit cards, but they do exist. For example, KOHO gives you 1% cash back on groceries, bills & services on the Easy account.
Debit vs credit cards: Which is better for new Canadian residents?
Most new Canadian residents will find that they want to have both a debit card and a credit card. These two cards offer a lot for newcomers as they make it easier to make payments on goods and services.
But due to the need to have a credit score to get most credit cards, many new residents start their life in Canada with a debit card and save getting a credit card for later. Either way, you have plenty of options for banking and finance in Canada. What’s important is that you find the tools that work best for your life.
Gaby Pilson is a writer, educator, travel guide, and lover of all things personal finance. She’s passionate about helping people feel empowered to take control of their financial lives by making investing, budgeting, and money-saving resources accessible to everyone.