Things have changed a lot since the appearance of the first credit cards in the United States in the early 1950s. At the time, these pieces of cardboard only allowed you to eat in restaurants that were members of the Diners Club. Today, there are more than 200 credit cards available in Canada, according to the Financial Consumer Agency of Canada (FCAC), a federal regulator. According to the Canadian Bankers Association (CBA), more than one million businesses in Canada accept Visa or MasterCard. And Canadians have close to 70 million credit cards in their collective wallet!
They all share certain characteristics: they offer a grace period, ie a period (between the date of purchase and the due date of the statement) during which no interest is charged. They all claim interest from customers who do not pay their balance by the due date. Finally, they all impose a minimum monthly payment.
That said, depending on the card, the grace period ranges from 17 to 26 days, the interest rate ranges from 9.9% to 28.8%, and the minimum payment required is 2% to 3% of the balance. . The benefits also vary enormously from one card to another: waiver of annual fees, travel insurance, discounts in certain businesses, discounts on flights, cruises or investment products, lark! Finding the one that meets our needs requires a good shopping effort.
Before you start
For example, some cards’ interest rate on balance transfers is as low as 1.9%. But this is only valid for a few months and often does not apply to new purchases. It is better to know this before subscribing to this type of card. Similarly, certain benefits or insurance may be offered with the card, but at an additional cost. In short, it is in our interest to ask questions and to read the passages in fine print or, at least, to have them explained to us. Here are the features to check before choosing a credit card.
The interest rate
According to the ABC, 73% of Canadians pay off their credit card balance in full each month. Is this our case? We can ignore the interest rate – whether it is 9.9% or 28.8% – and choose our card according to our preferences and the advantages it offers. If conversely, we often leave a balance on our card, it is in our best interest to opt for a reduced interest rate, that is to say from 9.9% to 14.5%. Disadvantage? These “cheaper” cards often come with an annual fee. To find out if they are for us, “we compare the amount of interest paid to the annual cost of the card,” says Johanne Arnould, budget advisor at the Cooperative Association for Family Economics (ACEF) in North Montreal. A balance of $500 will be paid less with a card that has an annual fee of $25 and an interest rate of 12% than with a card with no fees, but an interest rate of 19%. At the end of the year, the economy even reaches $445!
The credit limit
A credit limit of $5,000 is tempting! But is it for us? To find out, we evaluate our income and our expenses – not forgetting savings! This allows us to know how much we can borrow and repay each month.
Having the right credit limit is all the more important because if it is too high, it hurts our credit rating. Indeed, “lenders believe that you can borrow this amount at any time,” says Liane Chacra, financial planner at Investors Group. In other words, a credit limit is considered potential debt. As the result, “the bank could refuse you a loan to buy a car or grant it to you at a higher interest rate,” says Ms. Chacra.
So we don’t rely on the credit limits offered by financial institutions. “Because to offer a higher limit, they only look at whether we repay the minimum required each month, even if we cannot pay our entire balance,” says Johanne Arnould.
The different cards
Universal cards. Cards such as Visa, American Express, or MasterCard are the best known. They are accepted almost everywhere. Sometimes they are affiliated with a store, such as Esso or Canadian Tire, where they entitle us to additional discounts or rewards. “It can be interesting for someone who shops there, provided that the other conditions of the card, such as the interest rate, also suit him,” says Johanne Arnould.
Gold and Platinum cards. These high-end credit cards provide more services than so-called standard cards. Among other things, a concierge service through which “employees reserve seats at the restaurant of your choice or tell you in which store to find the gift you are looking for,” says Danielle Coutlée, director of sales strategies and support at RBC Royal Bank. Gold and Platinum cards also include, more often than standard cards, travel insurance which covers accidents and loss of luggage, for example. Convenient if you travel. These prestige cards require a minimum annual income – sometimes as low as $15,000 per household. Also, they often have a minimum credit limit of $5,000, as opposed to a limit of $500 to $1,000 for standard cards. Short,
Affinity cards. With some universal credit cards, an amount is added to our purchases which is donated to a charitable organization, such as the Canadian Red Cross, the Lions Club International, or Skate Canada. The Bank of Montreal is a champion in this regard: its credit cards support approximately 150 associations! The intention is good, but is it really useful? “It’s a quick and easy way to help a cause close to your heart,” says Jocelyne Daw, vice-president of marketing and community engagement at Imagine Canada, an organization that looks after the interests of charities. That said, the amounts paid rarely exceed 0.5% of the number of our purchases… or 50 cents per $100! However, this loose change accumulates thanks to the Allure card from the National Bank of Canada, for example, the Quebec Breast Cancer Foundation received $415,000 in 2008. The only downside for the consumer: “It’s the bank that receives the tax credit for these donations. Moreover, by making a donation in this way, you do not receive any prospectus or information from the organization you are supporting,” says Jocelyne Daw.
Merchant cards. A few stores, including The Bay or Home Depot, offer house credit cards. They are sometimes more advantageous than universal credit cards. First, they offer certain privileges, such as additional reward points or exclusive offers. “If these are the only places where we buy on credit, that prevents us from making impulsive purchases elsewhere,” says Edith St-Hilaire, budget advisor at ACEF Rive-Sud in Quebec. Beware, however, of late payments: the interest rates of these cards reach 28.8% – or up to 67% more than universal credit cards.
Discounts on financial products, airline tickets or cruises, free merchandise, or cashback: you have a choice when it comes to rewarding programs associated with a credit card. In the case of cashback, 0.5 to 2.5% of the total amount of our annual purchases comes back to us at the end of the year. Alternatively, most financial institutions offer house point programs. Only Bank of Montreal and CIBC, respectively, offer Air Miles points and Aeroplan points. It may be interesting to take a credit card there as long as you are already a member of one or other of these clubs.
In all cases, we evaluate the number of points required by the various financial institutions in exchange for our dream gift. For example, spending a dollar with our credit card earns us a point at Mouvement des Caisses Desjardins, Laurentian Bank, and Scotiabank. But, in their respective catalogs, a toaster oven is worth 170 points, 17,400 points, and 21,500 points! To find out if a reward program is worth it, “we compare the fees and interest paid to the value of the gifts or discounts received,” advises Véronique Milot. If we prefer to travel, we also check if our points entitle us to flights with any airline and if we can leave whenever we want. But be careful not to choose a credit card only for its reward program. “We also look at its interest rate, its annual fees, and its credit limit,” says Johanne Arnould. Being “addicted” to a rewards program has perverse effects, she adds: “Sometimes we are tempted to spend a few extra dollars just to get the points we are missing to receive a gift or a trip.”
Several standards, Gold, and Platinum cards are available at no annual fee. When not, standard cards typically cost $15-$35, and Gold and Platinum cards $50-$100. Generally, the more expensive a card, the more benefits it includes. It’s up to everyone to see if these are worth their weight in gold!
Is it better to do business with your bank?
Yes, replies Danielle Coutlée. “If there is any problem with our card – for example, it is blocked when we have paid our balance and there are funds in our account – our bank will be able to make a transfer or wire us the money because she has access to the accounts,” she said. Moreover, applying for a credit card at the banking institution where we already have a bank account and a mortgage is proof of our loyalty. As a result, “it will be easier to negotiate better conditions for all of our financial products,” says Caroline Lavallée, senior director of Mastercard Solutions at the National Bank of Canada. Finally, our finances are more easily managed when we see all our accounts and transactions on one website – that of our bank.
On the other hand, placing all our eggs in the same basket can play tricks on us if we do not always pay the minimum required. In these cases, “financial institutions sometimes make compensation payments: they will dip into a customer’s bank account to settle part of the balance on their card,” says Édith St-Hilaire. Admittedly, this is rare. But it upsets a budget!