What is a Credit Card?

A credit card is a payment tool from a bank or financial institution that gives you access to a revolving credit.

When you use a credit card, you're borrowing money to make purchases at stores, online, or over the phone.

At the end of each month, you must either pay back what you borrowed or pay interest on the remaining balance.

How credit cards work

When you use your credit card, you're temporarily borrowing money from the card issuer. The card comes with a credit limit—the maximum amount you can borrow at one time.

For example, with a $3,000 limit, you can spend up to that amount before needing to make a payment.

Each month, you'll get a statement balance showing:

• What you spent

• Minimum payment

• Due date

• Current interest rate

While you only need to pay the minimum amount to avoid late fees, paying the full balance helps you avoid interest charges, which typically hover around 19.99% in Canada.

Credit card bills

Your monthly statement details all your transactions during the billing cycle. It's important to review these statements regularly to:

• Make sure all charges are correct

• Catch any possible fraud

• Know how much you owe

If you can't pay the full balance, you must at least pay the minimum payment.

Using ATMs with credit cards

You can withdraw cash using your credit card, but this is called a cash advance and typically comes with:

• Higher interest rates than regular purchases

• Interest that starts accumulating immediately

• Additional fees

Because of these extra costs, cash advances should only be used in emergencies.

Credit limits

Your credit limit is the maximum amount you can borrow on your card. This limit is based on factors like:

• Your credit score

• Income

• Credit history

• Type of card (secured cards require a security deposit)

As you use your card, your available credit decreases. When you make payments, your available credit increases again.

Credit cards vs. other payment cards

Charge Card

• No preset spending limit

• Must pay the full balance each month

• No minimum payment option

• Very high penalties (around 30% interest) if not paid in full

Debit Card

• Linked directly to your bank account

• Uses your own money, not borrowed funds

• May result in overdraft fees if you spend more than you have

Prepaid Card

• Not linked to a bank account

• Must load money onto the card before using it

• Can't spend more than you've loaded

• Doesn't build credit history

Pros and cons of credit cards

Advantages:

• Immediate access to borrowed funds

• Helps establish and build credit history

• Many cards offer rewards, points or cash back

• Purchase protection on many cards

Disadvantages:

• Can lead to debt if not used responsibly

• High interest rates on unpaid balances

• Potential annual fees, cash advance fees, or foreign exchange fees

• May encourage unnecessary spending

Should you get a credit card?

A credit card might be right for you if you want to:

• Build credit history with responsible use

• Keep your credit utilization below 35%

• Earn rewards on purchases you'd make anyway

• Have a backup payment method for emergencies

How to get a credit card

Getting a credit card is straightforward:

1. Fill out an application online (takes just a few minutes)

2. The issuer will check your credit score (this counts as a hard inquiry)

3. If approved, you'll receive your card in the mail

4. Activate the card and set up a PIN

5. Create an online account to manage payments and view statements

Making the right choice

Credit cards can be valuable financial tools when used wisely.

Understanding how they work helps you make informed decisions about which card is right for you and how to use it responsibly.

Remember that a credit card isn't free money—it's a loan that must be repaid, ideally in full each month, to avoid costly interest charges.