Credit Cards Explained

What is credit? How does it work? How will it affect me? These are all important questions each of us needs to ask ourselves. It is better to learn this important information now, then suffer the consequences later.

Credit cards are a part of everyday life and the reality is you need to understand how credit cards work, and then with this knowledge make good choices.

Credit cards when used well can be: Credit cards when used poorly can:
  • A great way to build a good credit report
  • A safe way to have access to your money
  • A way to track expenses
  • Destroy your credit rating
  • Encourage overspending
  • Increase debt

Each month you will get a bill from your credit card company. We are using an invented statement; though yours may look slightly different, all bills will contain similar information.

You can also expand the Glossary of Terms below to view all definitions.

Glossary of Terms

Here are some of the key terms that you may find on your credit card bill.

  1. Statement Period or Billing Cycle: Usually 30 days in length. Purchases within the 30-day time period are highlighted in the purchase details. Purchase details are the central part of your bill that outline your transactions, including purchases, payments and returns.
  2. Statement Date: The last day of the current billing cycle.
  3. Balance Owing: Amount of money you owe up to the current statement date.
  4. Previous Balance: Money spent on your credit card on the previous billing cycle.
  5. Purchases: Amount of money spent on your credit card during the current billing cycle.
  6. Cash Advances: Allows cardholders to withdraw cash using their credit cards, either through an ATM or over the counter at a bank or other financial agency. These may have a higher interest rates and charges begin immediately upon use. No grace period for these puppies!
  7. Interest: The percentage rate you will be charged if you carry a balance is outlined. Interest rates for cash advances are higher than regular purchases. For cash advances, interest kicks in right away. For regular purchases, you have a 21-day minimum grace period to pay off your bill in full before interest is charged. Check out Interest 101 below to have a better understanding of the amount of money you may be losing on interest!
  8. Fees and Other Charges: Includes monthly fees (if you pay for your credit card account), past due charges and over limit charges.
  9. Payments: Money you have put towards paying off your balance.
  10. Past Due and Over Limit Amounts: Highlights whether you have missed your last payment or exceeded your credit limit. Both activities result in penalties that could include higher interest rates, additional fees or suspension of your credit card privileges.
  11. Minimum Monthly Payment and Payment Due Date: Your minimum monthly payment (usually 3% of your balance) must be received before this date, or you will incur late fees. Interest is charged, unless you pay your balance in full by the payment due date.
  12. Credit Limit: Maximum amount of money you can borrow within a billing cycle.
  13. Credit Available: Amount of money remaining on your credit card in the current month's billing cycle. This is calculated by subtracting the balance from the credit limit.
  14. Grace Period: You can calculate the grace period by determining the number of days between the statement date (end of the billing cycle) and the minimum payment due date. By law, institutions must give you 21-day grace periods at minimum. For more information, check out the Financial Consumer Agency of Canada's (opens new window) page on credit cards.
  15. The Most Important Thing Everyone Forgets to Read: It is now mandatory to have a statement on your credit card bill outlining how many years the current balance will take to pay off in full, making only minimum monthly payments. Want to see how long it takes to pay off $1800.00? It may take longer than you think!

Interest 101

When you have an outstanding balance, it’s important to understand all the components that go into paying it off in a timely fashion. It’s also important to keep in mind the interest rate, the minimum monthly payments and the time needed to pay it off.

Paying Only Minimum Monthly Payments

Here’s an example showing two possible methods (and there are many) to paying off your credit card bill. In this example, an imaginary student Mona is in her 2nd year of studies and buys an $1800.00 anniversary trip for her and her boyfriend Moe, on a credit card with a 19.99% interest rate. Mona’s credit card statement indicates that her minimum monthly payment is $54.00. Which payment method should she choose?

Option A Option B
Mona will receive the $54.00 from her parents for her minimum monthly payments until she graduates.

After graduation, Mona plans on maintaining the $54.00 monthly payments from working.
Mona will receive $54.00 from her parents for her minimum monthly payments until she graduates.

She also obtains a part time position during school and adds another $70.00 a month (10% of her part time income) towards debt repayment.

This means that Mona will pay $124.00 a month towards her credit card bill. Take a look below to see what difference this makes!
Payments for Option A Payments for Option B
Monthly payment:
(If Mona pays only minimum stated on her bill)
$54.00 Monthly payment:
($54 minimum payment + $70)
Original cost of trip: $1,800.00 Original cost of trip: $1,800.00
Years to pay for trip + interest:
(If Mona only makes $54.00 minimum payments)
4 years &
2 months
Years to pay for trip + interest:
(If Mona continues to pay $124.00/month)
1 year &
5 months
Interest paid: $848.54 Interest paid: $277.93
The ACTUAL cost of the trip:
(Price of trip + interest)
$2,648.54 The ACTUAL cost of the trip:
(Price of trip + interest)
Therefore, if Mona chooses Option B over Option A, she saves:
2 years and 9 months of additional payments, and $570.61 in total!

As you can see, credit cards are not all they are cracked up to be. Paying only minimum monthly payments on your credit bill makes you lose money and ties up future funds because of the time bills take to pay off.

Spend only what you have. Pay off the balance ASAP. Skip the madness.

How Does Interest Accumulate Anyway?

The truth is, if you do not pay off the balance of your credit card in full each month, the interest will accumulate on the original amount credited.

Using the example in the Paying Only Minimum Monthly Payments section above, if you were to pay $1500 of the $1800 credit card bill before the due date, the interest would still kick in on the full $1800, not just the remaining $300. This is why credit card bills take so long to pay off!

An easy solution to this problem you may ask? Pay your bill in FULL (or as much as you possibly can) each month so interest is not charged!

Quick Credit Card Calculator

There is a great calculator found at the Financial Consumer Agency of Canada (FCAC) (opens new window)! You can input your own balance, interest rate and desired payment.

The site will automatically show you the time it will take to pay off your entire balance, how much interest you will have paid, as well as the actual price of the products or services on your credit bill.

The actual price refers to the price of a product or service after interest. This is important to understand because something that may have originally had a price tag of $200.00 when you bought it, may have a much larger price tag once credit card interest is taken into account.