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How Credit Cards Work

Credit cards are widely used and accepted as a method of payment for goods and services in Canada. As the name indicates, when you pay for something with a credit card, you are doing so “on credit” with the trusted assumption that you will pay off the balance of your card at a later date – so, it’s more or less a short-term loan.

Here’s a quick look at exactly how credit cards work, including who issues them, who uses them, and how their interest charges and payments are applied.

How credit card companies operate

When you look at any of the credit cards on our website, you'll see that they all have one of three logos on them. These logos indicate which of the three credit card organizations approved the card: Visa, MasterCard, or American Express. Credit card branded goods are licensed to lenders, such as banks, credit unions, and even retailers, who then issue them to you, the customer.

When you apply for a credit card via a lender, a merchant, or a third-party site like Ratehub.ca, your application is sent to the credit card provider you choose for approval. Each credit card business is in charge of accepting applications and increasing credit limits, and it generates money by collecting fees and interest to both its customers and retailers that accept their cards as payment.

How consumers use credit cards

You'll get a new credit card in the mail if your credit card application is approved, and you'll be the principal cardholder. It's yours to use as a payment method after you've activated it. Your credit card will have a credit limit, which is the maximum amount of money you may spend on it. The credit card company will pay any merchant that takes your credit card on your behalf, but you are responsible for paying off the amount on your card.

Credit cards are now not just short-term loans, but also a "revolving" debt, which means you may continue to "borrow from" (charge) them even after you've paid off your prior outstanding sum. For example, if your credit limit is $5,000 and you owe $1,000, you may make a $1,000 payment and then borrow up to $5,000 again if necessary. If you're a reliable borrower, your credit card provider will authorize you for a specified credit limit, which will always be available to you.

It's crucial to understand that a credit card account may be shared by many people. Extra cards for approved users of your account, such as a kid, partner, or spouse, may be requested at any time. The main cardholder, on the other hand, is the sole one who is responsible for paying off any balance owed, and whose credit history would be harmed if they overspent or missed payments. As a result, only allowing individuals you trust to become authorized users of your account is critical.

Credit card statements and dates

Your credit card issuer (which is most likely a bank or shop, not the credit card company itself) will give you a credit card statement at the conclusion of your billing cycle that details all of your transactions (both purchases and payments) for the month. When reading your credit card account, there are a few things to keep in mind.

The statement date and the payment due date are the first two crucial dates to remember. The statement date refers to when this statement was produced and sent to you. The payment due date, on the other hand, is the day on which you must make your minimum payment. The grace period is the number of days between the statement date and the payment date; it is typically 21-25 days and is the amount of time you have to pay off your debt in full without incurring credit card interest charges.

Let's imagine your credit card statement was sent to you on June 1st, 2014. If your payment was due on June 22nd, 2014, you have a 21-day grace period on your card. You would not be charged interest on the debt if you paid it off in full (not just the minimum payment) within the grace period. If you can't pay off the whole sum on your bill, you'll be charged interest on the full amount - and it begins accruing from the day you made each purchase.

Minimum payments and other credit card fees

Whether or whether you are able to pay the debt in full each month, you must make at least the minimum payment to prevent interest rate rises or harm to your balance transfer or cash advance charge. It's also worth remembering that certain transactions, including as balance transfers, cash advances, and cash-related transactions like the purchase of money orders or casino chips, need interest to begin accumulating right away.

How credit card payments are applied

When you make a payment on your credit card, it initially goes toward paying off a part of your interest rates, as well as any additional fees shown on your statement. If you have a credit card debt, this is why it doesn't go down as fast as it should — whatever was left over from previous months has continued to accumulate interest, which accrues additional interest the following month and resulting in a greater amount.

How to close a credit card account

A credit card account may be closed at any moment by both the main cardholder and the credit card issuer. If your card has an outstanding amount when the account is cancelled, you must pay it off in full.

Last but not least, the length of time you've been establishing your credit history accounts for a portion of your credit score. Since a result, it's recommended that you never cancel your oldest credit card, as it's been crucial in establishing your credit history for the longest time.

Credit cards are one of the most convenient methods to pay for products and services; they are widely recognized by businesses in Canada and more than 200 countries around the globe, and they enable you to borrow money in the short term while also potentially earning big benefits if used properly. Pay off your bill in full during your grace period to take advantage of them, and you won't have to worry about interest charges or the minimum payment credit card debt trap.