Credit Card Basics Canada: How Credit Cards Work, Interest and Fees

A credit card lets you borrow up to a set limit and repay it each month. Paid in full by the due date, purchases cost no interest; carried over, a balance is charged interest at some of the highest rates of any consumer credit, and the card can add fees on top. The guides below explain how Canadian cards work, what they cost and what to do when something goes wrong. Card picks and reviews are in our credit card reviews, and credit scores have their own credit score guides.

How cards cost money

• How credit card interest works: daily interest, the grace period and how to avoid paying it
• What counts as a good credit card interest rate: rates by card type and asking for a lower one
• Credit card fees (below): annual, foreign currency, over-limit and the other fees a card can charge
• Minimum payments: how the minimum is set and how long payoff takes at the minimum or a fixed payment
• Credit card cash advances: limits, fees and interest from day one
• Balance transfer calculator: whether moving a balance saves money after the fee

Cards compared with other ways to pay and borrow

• Credit card vs debit card (below): protection, cost and credit building
• Line of credit vs credit card: rates and when each is cheaper

Getting a card

• The easiest credit cards to get with no or limited credit history
• Credit cards for newcomers and new immigrants: bank newcomer programs and what to bring
• How long to wait between credit card applications
• Why was my credit card declined?

To compare cards, see the credit card comparison; to choose one, see how to choose a credit card.

Payments, problems and disputes

• Paying your credit card bill: what happens if you miss a payment
• Paying off credit card debt
• Credit limit increases and decreases
• How to dispute a credit card charge: chargebacks, the steps and the timelines
• How to cancel a credit card transaction: pending and recurring charges
• How credit card refunds work
• Cancelling a credit card: the steps and what closing a card does to your credit score

Card features and sharing a card

• Credit card travel insurance: the travel cover cards include and its conditions
• Authorized users and joint cards (below): who’s liable, how each is reported and what being an authorized user does for your own credit

What happens to card balances after a death is covered in what happens to debt when you die.

Credit scores

How your card use shapes your credit score, from how scores are calculated to credit score ranges, checking your score for free and what happens when you close a card, is in the credit score guides.

Credit card vs debit card

A credit card borrows the issuer’s money until the statement is paid; a debit card spends your own money straight from your account. The table below sets out the differences, and the sections after it cover cost, protection and credit building.

The differences at a glance

How a Canadian debit card works in detail, including Interac and the Visa and Mastercard debit networks, is covered in what is a debit card.

Cost

Paid in full each month, a credit card costs only its annual fee, if it has one, since purchases get an interest-free grace period. Carried over, a balance is charged interest at the card’s rate, which is why how credit card interest works matters to the comparison. A card also has other possible charges, set out under credit card fees below. A debit card’s cost is your bank account’s fee structure.

A merchant can also add a surcharge for paying by credit card; see merchant surcharges below.

Protection

Unauthorized charges. With a credit card, a fraudulent charge is on the issuer’s money while it’s investigated, rather than gone from your chequing account. With debit, the money leaves your account at once, which can bounce other payments while the claim is sorted out. Visa’s Zero Liability policy, for example, covers Canada-issued cards with conditions, including that you “notify their financial institution immediately of any unauthorized use” (other networks and issuers set their own terms). How a fraud claim works for each is covered in disputing a credit card charge and in your bank’s debit card terms.

Purchases that go wrong. A credit card purchase that isn’t delivered or isn’t as described can be disputed through the card network as a chargeback. Debit purchases don’t have the same process.

Coverage. Many credit cards include purchase protection, an extended warranty, rental car coverage and, on some cards, travel insurance. Debit cards generally include none of these. What each type of coverage does, and its limits, is explained in credit card insurance explained.

Rewards

Many credit cards earn points or cash back on spending, and the credit card comparison lists each card’s earn rate. A few prepaid and debit products pay cash back too. Rewards only come out ahead if the balance is paid in full; a single month of interest on a carried balance can wipe out a year of rewards.

Credit building

Credit card accounts are reported to Equifax and TransUnion every month, so on-time payments build your credit history and a missed payment damages it. Debit card use isn’t reported at all. For someone building credit, a card used lightly and paid in full is one of the main tools; see how to build credit from scratch.

When each is the better choice

Many people use both: a credit card for most spending, paid in full each month, and a debit card for cash and for merchants where a card costs extra.

Credit card fees

Interest is the cost most people think of with a credit card, but a card can also charge a range of fees, some yearly, some per transaction and some only when something goes wrong. The Financial Consumer Agency of Canada (FCAC) puts it simply: “Different credit cards have different fees.” Every fee a card charges is set out in its application and cardholder agreement. Below is each kind of fee, what triggers it and the usual ways around it.

Annual fees

FCAC: “Financial institutions may charge an annual fee for some of their credit cards. Usually, the charge will appear on your credit card statement once a year. Cards with an annual fee usually offer extra rewards and benefits or a lower interest rate.”

Cards range from no fee to several hundred dollars a year. A few examples from our card data:

Avoiding it. A card with no annual fee avoids the charge altogether, and FCAC notes that “Some no-fee credit cards offer similar rewards and benefits to cards that do have an annual fee.” Whether a fee is worth paying depends on what you’d earn or save: FCAC’s own test is to estimate a year’s rewards and subtract the fee. Our no annual fee card picks list the no-fee options, and the credit card comparison shows each card’s fee side by side.

Additional cardholder fees

“You may have to pay an additional annual fee if you request a card for an additional cardholder. The fee for the second card is typically lower than it is for the first card,” FCAC says. The table above shows a few cards’ fees. Some cards charge nothing for extra cards. How an extra card works for the other person, and what it does for their credit, is covered under authorized users and joint cards below.

Foreign currency conversion charges

When you pay in another currency, the issuer converts the amount to Canadian dollars and then adds a conversion charge as a percentage of it. FCAC’s example: a €1,000 purchase converted at 1.45 is $1,450, and a 2.5% conversion rate adds $36.25, for a total of $1,486.25. A 2.5% charge is common among the cards in our data (it’s also the rate in FCAC’s example), while some cards charge none: the Scotiabank Passport Visa Infinite+, for example, lists a foreign transaction fee of 0%.

Avoiding it. A card with no foreign transaction fee, or a U.S. dollar card for frequent U.S. dollar spending, which FCAC says can help you “avoid having to pay foreign currency conversion rates.” Our no foreign transaction fee card picks compare them. Refunds on foreign purchases can come back at a different exchange rate than the original charge.

Cash advance fees

Taking cash on a card usually costs a fee each time, set as a fixed amount, a percentage or both, plus interest from the same day with no interest-free period. The fee is higher outside Canada, according to FCAC. The full cost, the limits and the alternatives are in credit card cash advances.

Balance transfer fees

“A balance transfer fee is usually a percentage of the amount that you transfer,” FCAC says; with a 3% fee, moving a $1,000 balance costs $30. The interest saved has to outweigh that fee, and a promotional rate usually lasts only for a set period. The balance transfer calculator works out whether a transfer saves money after the fee, and our balance transfer card picks compare the offers.

Over-limit fees

Going over your credit limit can cost an over-limit fee. FCAC: “If you go over your limit, you may have to pay an over-the-limit fee. Federally regulated financial institutions can’t charge over-the-limit fees in certain situations. For example, if a merchant puts a temporary hold on your credit card that goes over the credit limit.” A gas pump hold of $100 when you have $90 of room and spend $20 is FCAC’s example of a case where the fee can’t be charged.

Avoiding it. FCAC suggests asking the issuer to stop transactions that would go over the limit (not every issuer offers this, and some low-value transactions may still go through), setting up low-credit alerts, or asking for a higher limit. An issuer must get your express consent before raising your limit. If a purchase is refused at the till instead, why a credit card gets declined covers the usual reasons.

Late and missed payment costs

Missing the minimum payment or paying late doesn’t only risk a fee. FCAC lists “your interest rate increasing”, damage to your credit score, the loss of any promotional rate and the issuer cancelling the card. A card’s late payment terms are in its agreement. What happens if you miss a credit card payment covers each consequence, and minimum payments explains how the minimum is calculated.

Dishonoured payment fees

A payment that bounces can cost a fee. FCAC says this applies if you pay by credit card cheque and it’s returned for non-sufficient funds (NSF), if a pre-authorized debit payment is rejected for NSF, or if you use a credit card cheque for a cash advance that goes over your limit. Paying from an account with enough money in it on the payment date avoids it.

Reprinting fees

“Your financial institution may charge you when you ask for copies of certain documents,” FCAC says, such as reprinted statements or receipts from earlier statements. Online statements usually avoid the charge; FCAC notes institutions “usually allow access to online statements for the previous 12 months.”

Inactive account fees

“Some financial institutions will charge an inactive account fee if you don’t use your credit card for a long time,” according to FCAC, which adds that an institution “may even close your account if your card is inactive for a year.” An occasional small purchase keeps the card active. Closing an unused card instead has its own effects, described in how to cancel a credit card.

Balance insurance premiums

Credit card balance insurance, sold as an add-on, charges a premium on the card. FCAC lists it among a card’s possible fees. It is separate from the travel and purchase coverage some cards include at no extra charge, which credit card insurance explained covers.

Merchant surcharges

A merchant can add a surcharge for paying by credit card, except in Quebec. FCAC: “Your purchase may cost you up to 2.4% more. They must inform you of the surcharge before processing your payment.” The surcharge must be shown at the point of sale, at the store entrance and on the receipt. Paying another way, or at another merchant, avoids it. Where one applies, paying by debit avoids it; whether a card’s rewards make up for it depends on the card’s earn rate.

Secured card set-up fees

Some secured cards add a one-time set-up fee to the deposit; our secured credit card picks compare deposits and fees.

Where to find a card’s fees

A card’s fees are set out in the information box included with the credit card application and in the cardholder agreement, and the monthly statement shows any fee charged that month. The other main cost of a card, interest, is explained in how credit card interest works.

Authorized users and joint cards

An authorized user, also called an additional cardholder, gets a card linked to someone else’s credit card account. It’s a common way for a parent, partner or family member to share spending access. What it means for liability and for the added person’s credit is often misunderstood, so this section sets it out from the Financial Consumer Agency of Canada’s (FCAC) guidance.

There are several ways to share a credit card account in Canada: adding an authorized user or additional cardholder, applying together as co-borrowers on a joint account, or having a guarantor stand behind someone else’s card. They differ in who owns the account, who has to pay the balance and how each person’s credit is affected.

The roles at a glance

FCAC describes four roles:

Source: FCAC, Joint credit cards.

Authorized users: who owns the account and who pays

The primary cardholder adds another person, who gets a card on the same account. FCAC is clear about both sides. For the primary cardholder: “Any purchases made by an additional cardholder or authorized user will appear on your monthly statement. If you’re the primary cardholder, you’re responsible for paying for these purchases.” For the added person, FCAC says to keep in mind that “the credit card account belongs to the primary cardholder” and “you’re not responsible for paying back any money owing on the credit card account.”

Source: FCAC, Joint credit cards.

What it does for your credit

FCAC’s guidance for an additional cardholder is direct: “any purchases you make using the card won’t help you build your credit history.” The account belongs to the primary cardholder, so being an authorized user isn’t a substitute for credit in your own name. Whether an issuer reports anything about an authorized user to Equifax or TransUnion is up to the issuer; if that matters to you, ask the issuer what it reports and to which bureau, and check your own report afterwards (see checking your credit score for free). The two bureaus are compared in Equifax vs TransUnion.

Being added doesn’t involve an application in your name, so there’s no hard inquiry on your file; soft vs hard credit checks explains the difference.

To build a file of your own, the usual routes are a starter or student card, a secured credit card or a credit-builder loan, set out in order in how to build credit from scratch.

The risks, for each side

• For the primary cardholder: every purchase on the added card is theirs to pay. A high balance run up on the added card also raises the primary cardholder’s credit utilization, and a missed payment is reported on the primary cardholder’s file.
• For the authorized user: the card can be cancelled or the limit changed by the primary cardholder or the issuer at any time, so it isn’t reliable credit to plan around.

Being added and being removed

The primary cardholder adds a user through the issuer’s phone line, app or online banking, usually with the person’s name and date of birth, and the issuer sends a card in that name. Some issuers charge an annual fee for each additional card; credit card fees above covers additional cardholder fees.

FCAC says the primary cardholder “may add and remove additional cardholders and authorized users to your card at any time.” After a removal, the added card stops working; charges made on it before removal remain the primary cardholder’s to pay. Closing the whole account is a separate decision, covered in does closing a credit card hurt your credit score.

Joint accounts (co-borrowers)

Some issuers let two people apply together. Both are co-borrowers, both can use the account and both are “equally responsible for the balance.” Because the account is in both names, its payment history reflects on both people: on-time payments help both, and a late payment or a high balance counts against both. With a federally regulated issuer, each co-borrower must receive the account’s required disclosure information. Joint credit cards are less common in Canada than primary-plus-additional-cardholder accounts; ask the issuer whether it offers them.

Guarantors

Someone who wouldn’t qualify on their own can sometimes get a card with a guarantor, often a parent or guardian of a minor. The guarantor can’t use the account but is responsible for the balance if the cardholder doesn’t pay.

After a separation

• Authorized user or additional cardholder: the primary cardholder can remove them at any time by contacting the issuer, after which the added card stops working. Charges made before removal remain the primary cardholder’s to pay.
• Joint account: both co-borrowers stay responsible for the balance, including charges made by the other, until it’s paid and the account is closed. Closing a shared card is one of the situations covered in does closing a credit card hurt your credit score, and how to cancel a credit card covers the steps.

After a death

An authorized user isn’t responsible for the primary cardholder’s balance when the primary cardholder dies; the estate is. A co-borrower on a joint account remains responsible for the balance. What happens to debt when you die covers how the estate deals with card debt.

Spouses and tax

Adding a spouse as an authorized user has no tax consequence in itself. The CRA’s attribution rules can apply when one spouse gives or lends the other money that is then invested, regardless of whose card is used; attribution rules explains when income is taxed back to the spouse who provided the money.

Which arrangement suits which situation