Credit Card Concepts

Before choosing the credit card that is right for you, understanding the basic concepts surrounding credit cards is essential. The concepts and terminology listed here will give you a good foundation to build from if you are new to credit cards, and refresh your memory if you are a veteran.There are several things to watch closely when considering applying for any credit card that can strongly influence whether the card is right for you or not.

Class - Standard, Gold, Platinum, Infinite

Many cards come in a mixture of standard, gold, platinum or infinite formats. Some may come in some or all of the formats and others may come in just one format and there are no set rules for what defines a particular class of card, so it can actually end up being quite confusing. Typically a higher class of card brings a different and better suite of features with it when compared to a lower class of card, but not always. Some of the variables often affected by card class include fees, reward type and amount, perks like extended warranty and travel insurance, minimum and maximum credit limits, eligibility requirements, sign up bonuses, and more.

That said, the class of a credit card is more or less just a status symbol that doesn’t end up meaning a whole lot. In fact, there are standard cards that have better features than some of the most prestigious cards available so you should always consider the merits of the card first before even looking at the class. All other things being equal, then, and only then, it makes sense to apply for the highest class of card for which you are eligible.

Type

There are 3 major credit card types in Canada: American Express, MasterCard, and Visa. A fourth lesser known type is Diner’s Club which used to be the card of choice for many hard core deal hunters, but lately its popularity has dwindled significantly. Basically, these types just identify the credit card company itself along with their respective networks that are responsible for funding, managing, and processing the transactions people make to their cards. What are the major differences between these credit card types then, you might ask? What material impact does it have on you? Well, the differences are actually quite small when compared to the differences you will see when comparing one individual card to another. Each of these companies must remain competitive and relevant to you the consumer, therefore almost everything about them is nearly identical. Though, some minor differences do still exist; here are a few I have come up with:

• American Express (Amex):
  • Worldwide acceptance is not as strong as MasterCard and Visa.
  • Not as universally accepted by merchants as Visa and MasterCard. You will occasionally be refused.
  • Known for higher merchant fees, which negatively impacts merchant acceptance.
  • Known for higher interest rates, which negatively impacts consumer adoption.
  • Many of their cards are charge cards instead of credit cards, meaning they are supposed to be paid in full each month. This also gives them an excuse to charge unbelievably high interest rates of 30% or more and to say these cards have no preset spending limit (credit limit).
  • Rewards and perks with Amex are often considered to be better or more elite.
  • Costco doesn’t accept any other card than Amex.
  • Only card to be issued directly by the credit card company itself, instead of by a bank or other financial institution.
  • Charges two currency conversion fees to Canadians when making purchases outside of Canada and the USA.
  • More information @ Wikipedia.

• MasterCard:
  • Accepted almost everywhere credit cards can be used in North America.
  • Largely accepted worldwide but there are occasional exclusive agreements where certain businesses only take one card type.
  • Part of the Cirrus network that is accepted at bank machines marked with the Cirrus logo.
  • Often associated with better and/or broader spectrum of awards than Visa.
  • Typically provides more “cool” features like card customization with a favourite hockey team or cute picture.
  • Gaining popularity for its worldwide acceptance and marketing efforts.
  • Currently the only credit card accepted at Tim Hortons.
  • More information @ Wikipedia.

• Visa:
  • Accepted almost everywhere credit cards can be used in North America.
  • Largely accepted worldwide but there are occasional exclusive agreements where certain businesses only take one card type.
  • Part of the Plus network that is accepted at bank machines marked with the Plus logo.
  • Is still the most popular type of card but recently MasterCard has gained significant ground by being very competitive.
  • Official sponsor of the Olympic Games and consequently the only card accepted at the games.
  • Used to be accepted exclusively at McDonalds, but MasterCard is now accepted there as well in most locations.
  • Most prominently offered by well known Canadian banks and financial institutions.
  • More information @ Wikipedia

Issuer

There are many credit card issuers in Canada and even more in the United States and, with the exception of American Express, they are completely separate entities from the credit card companies. Instead the card issuers are affiliated with one or more of the companies or types mentioned above. Both Visa and MasterCard are available at various big banks in Canada with Visa having a definite edge being offered by CIBC, Scotia Bank, Royal Bank, and TD Canada Trust. MasterCard, on the other hand, is available only at Bank of Montreal and some lesser known banks like National Bank and pseudo banks like MBNA and Capital One.

There really is no advantage to choosing one issuer over another other than some financial institutions will give you discounts if you combine multiple products (i.e. bank accounts, credit cards, loans, mortgages, investments, etc). These discounts are usually not large enough to be worthwhile and can easily be worked around with other solutions. It is best to let the merits of the card choose the issuer for you, instead of going to an issuer first and then choosing a card.

Fees

Some of the better cards available have annual fees associated with them. These cards are usually gold or platinum cards, often have a stronger rewards program, and have special perks and benefits associated with them. However, never assume that because a card has a fee that it is better than another card. Some of the best cards available have no annual fees associated with them at all. Granted, there is usually something that a no fee card will lack that a fee-based card may have, but you can usually get a complete set of benefits by having several no fee cards each reserved for use in different circumstances.

Interest Rate

This should not be an important factor when choosing a credit card because you are going to pay the entire amount owed in full and on time every month, right? Right?!

In truth it is an important factor when choosing a credit card because interest rates can range from as low as Prime, or lower during promotional periods, to as much as 30% or more. Another thing to watch out for is cards that raise the interest rate when you miss payments. They might advertise a low interest rate but as soon as you miss a payment or two it jumps up by an enormous amount. Another good reason to always pay in full and on time!

If you credit card has a low enough interest rate that approaches prime, you might actually consider using it as a means to borrow money for the longer term, but always make sure there aren’t any lower interest rate options available before doing this.

Cash Advance Interest Rate

Many cards will entice you with a promotional cash advance interest rate in these forms:

• Promotional interest rate for balance transfers from other cards.
• Cash advance cheques mailed to your home with interest rates nearing 0% in big bold letters.
• Telemarketing calls to tell you about the next great interest rate promotion.

In some rare cases the cash advance interest rate has no time limit and in even rarer cases there is no time limit for you to take advantage of the offer. So what is a cash advance interest rate anyway? Well, first of all, a cash advance is when you withdraw cash directly from your credit card as opposed to making purchases with your credit card. You can do this at the bank, at an ATM, or by using special cash advance cheques to deposit the funds directly into your bank account. So the cash advance interest rate is an interest rate that does not need to match your regular interest rate at all and is, in fact, entirely separate. It is even possible to have multiple cash advances active on your account, each with a unique interest rate all of its own!

Before you get all excited about free money, I must inform you that I do not recommend using credit cards for cash advances for these simple reasons:

• The interest starts being charged immediately after you access the cash. You heard right, there is no grace period with cash advances.
• There is often a fee simply for doing a cash advance. It can either be a flat fee, a percentage of the total withdrawal, or a percentage with a flat minimum.
• When paying off your credit card balance, money is usually applied to the lowest interest rate balance first even if the higher interest rate charges are older. That means you can forget keeping a cash advance for a long period of time while using the credit card for other purchases. You will be charged the higher interest rate for those purchases until their entire cash advance is paid in full, only then will your payments be applied to higher interest purchases.

There are a few rare cases where cash advances are actually a good idea. One of these is if you currently have a lot of pre-existing high interest debt and you can obtain a credit card with a stable low cash advance rate or, perhaps, a fairly long promotional interest rate, say 1 to 1.5 years. You can use this low interest card to pay off your other high interest debts and then pay down the debt quicker due to the lower interest charges. Once you do this, you must immediately stop using the card for the third reason listed above. In fact, a low interest card being used for debt consolidation should be cut up or put on ice immediately after the low interest cash advance is done and never used again until it is entirely paid off.

Grace Period

The grace period is the period of time you have to pay off your monthly debt before you incur any interest charges. Most people know this, but they may not know that this period isn’t always a full month. It can be 28 days or even as short as 3 weeks. It is a good idea to make calendar reminders for yourself reminding you to pay off cards with shorter grace periods. Be sure to leave yourself lots of extra time to be certain you aren’t late.

Another sometimes overlooked fact is that if you do not pay in full and on time then you will pay interest from the day each charge was made on your card, not from the payment due date. This means that if you innocently miss your payment date by a day or two, you will end up paying interest charges for that full month that you thought you were getting for free.

Minimum Income

Many of the more “prestigious” cards require you to meet certain minimum income requirements or in other cases your household minimum must meet a minimum instead. There are even reported cases of credit card companies calling your employer to verify your employment. And why not? You could just run off with their money after all! Give them your personal work number, not the main line to avoid any embarrassing situations. Note that income exceptions are sometimes made for students or people with good credit. If you really want a particular card but don’t meet the minimum income requirements, you may want to call in or apply anyway to see if something can be worked out.

Continue on to Credit Card Reward Types or navigate to other areas of the Credit Cards section using the menu on the left.