Credit Cards
Credit cards are a fixture in the wallet of many Canadians. So much so, that at the end of 2001, there were 68.6
million credit cards circulating in Canada, or about 2.9 for every adult. During 2001, we used bank credit cards
(which represent 44.1 million cards, or roughly 64% of the cards in circulation) for transactions totaling over
$138 billion, with the average transaction amount being $99.16. Outstanding balances on these bank cards at the
end of October 2001 totaled almost $39 billion.
The Legal Agreement
Card Issuer
The financial institution or retail establishment which issues credit to its customers to make purchases and/or obtain cash advances.
Card Holder
The customer of a financial institution or retailer who possesses a credit card issued by that credit grantor.
Cardholder Agreement
The legal document (contract) in which the cardholder agrees to abide by the terms and conditions established by the card issuer
for the issuer’s card.
Possible Fees
Annual Fee
The amount which card issuers charge cardholders annually for the privilege of using one of their credit cards. This may range
from no annual fee to $100 or more for some “prestige” Gold or Platinum cards.
Transaction Fee
Some card issuers charge a fee each time you use their card. A common transaction fee is the Cash Advance Fee. Nearly all card
issuers charge a special fee when you take a cash advance on their card.
Late Payment Fee
If payments are not made on time, some card issuers charge a late fee in addition to interest charges.
Over-the-Limit Fee
Some card issuers allow cardholders to exceed their credit limit for one transaction, but charge up to $15 when they exceed the
limit.
"Interest"ing Points
Interest Rate
The percentage rate at which interest is charged is calculated on any outstanding balance or cash advance on a credit card. Rates
are set by the issuing credit grantor, and may range from around 10% to nearly 30% per year.
Fixed Rate
The interest rate on a card is set at a certain percentage rate, and does not change from that rate, except very infrequently
under unusual circumstances. This is most common with retail credit cards.
Variable Rate
The interest rate fluctuates, and changes may be specifically based upon changes in the financial institution’s prime lending
rate. This is most common with bank cards.
Grace Period
The time you are permitted to pay off a balance without incurring any interest charges. This is usually 21 or 30 days.
Compounding
Compounding occurs when interest is charged on top of unpaid interest owing to the card issuer. This can be done
on a monthly, or more usually a daily, basis and has the effect of increasing the amount of interest you pay. The
interest rate stated by the card issuer may be misleading, because that is an Annual Percentage Rate (APR). Daily
or monthly compounding increases the real interest rate above the stated APR if a balance is carried from month to
month. Bank Cards
Interest is compounded daily, so making payments between statements and saves money. Interest is also charged on
cash advances from the day you borrow until they are paid in full. It is not charged on purchases showing up on your
statement for the first time if the entire statement is paid by the due date. But when the balance is not paid in
full by the due date, interest is charged on the daily balance from the date the purchases have been posted to the
account until it is paid in full. Retail & Gas Cards
Often you pay less interest if you pay at least half of the balance each month. Retail cards subtract payments equal
to 50% or more of the balance from the amount on the statement before charging interest.
Making Payments
Minimum Payment
The minimum amount which the card issuer requires you to pay in a given month is usually 3% to 5% of the total outstanding balance.
By only paying this minimum payment, interest is charged on the remaining balance. A $2,000 balance on a retail credit card which
charges 28.8% interest will cost $6,772 in interest charges and take more than 30 years to pay off if only a minimum payment
of 3% of the balance (minimum $10 payment) is made each month.
Payment in Full
If the entire balance is paid off at the end of the month, then depending upon the type of grace period (interest calculations)
there may not be any interest charges.
Due Date
The date, set by the card issuer each month, by which a cardholder’s payment must be received. After this date a payment
is considered late.
Other Types of Cards
Charge Cards
These cards can be used like credit cards, but the balance must be paid in full every month.
Debit Cards
With this type of card, the cardholder is actually paying the merchant at the time the card is used.
Affinity Cards
Many charitable and educational organizations have arrangements with financial institutions whereby cardholders can select an
“affinity” card to support that particular organization. A small percentage or fixed amount from each purchase made
with the card is donated by the institution to the charity or university.
Incentive Cards
These are the products of commercial relationships between card issuers and one or more businesses that deal with consumers.
If the name of the business appears on the card itself, it is called a Cobranded Card. The most common of these are “Air-Miles
Reward” cards which grant travel points, and rebate cards which offer rebates toward the purchase of large ticket
items like new cars (ie. TD GM VISA and CIBC Ford VISA).
Choosing a Credit Card
The most important consideration is how you use your credit card. Most of your costs relate to your spending practices.
If you pay the balance in full each month and never take a cash advance, you will pay no interest. If you are late
paying, take cash advances, and spend over your limits then you will pay more in transaction fees.
Some banks offer the choice between a standard card and a lower interest rate option. However, the lower rate option
cards often have higher annual fees, so it may be necessary to determine the “break-even point” which
makes the low rate option worthwhile. If your outstanding balance is low or nil from month to month, a regular card
with no annual fee might in fact be a better option.
You might also want to consider:
Fees
Does the card have Annual, Transaction, Cash Advance, Late Payment or Over-The-Limit fees? How much are they?
Grace Period
What is the grace period if any?
Liability
If your card is lost or stolen, how much are you liable for?
Affinity/Incentive
Do you wish to support a favourite charity or school? Do you want to earn points towards Air Miles, a new car
or truck, or a mortgage? Most affinity and incentive cards will charge you a higher interest or additional
service fees for that privilege. It may be cheaper to save for that car or trip or donate to the charity directly
yourself.
Protecting Your Credit Cards
Credit card fraud is a growth industry. In 2001, the illegal use of credit cards cost Canadian financial institutions
a new record of over $142 million, due to over 116,000 cards being used fraudulently. Counterfeiters get legitimate
names and account numbers from local merchants and then emboss them on the front of the card. Sometimes the magnetic
strip on the back of the card can be altered. You can help by protecting your credit or debit card as carefully as
you protect cash:
- Sign new cards as soon as you receive them.
- Never leave cards lying around, in your car, or in your desk at work.
- Check your wallet frequently for missing cards.
- Never loan your card to a friend - never tell anyone else your PIN number.
- Never give your credit card number over the phone unless you placed the call to a reputable business to make a purchase.
- Ensure that you get the right card back after using it for a purchase.
- Always ensure the carbons are destroyed after signing the receipt.
- Do not sign a blank sales slip.
- Keep your receipts and compare them with your statement; if you believe there is a mistake on your bill, call the card issuer
to enquire about it.
- If your card is lost or stolen, call the issuer immediately to cancel your card.
For More Information
The Financial Consumer Agency of Canada carries information
about credit card rates and fees on its web site.
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