Do Canadian Credit Cards Work Differently from the Rest?

How many credit cards are in circulation at any given time? A lot. In Canada alone, there are at least 76.2 million Visa and MasterCard credit cards in circulation (the total population is approximately 36.99 million). That means there’s likely at least one credit card for every Canadian adult—and probably more since some adults have more than one credit card.

How can one use credit cards wisely? How does a credit card work? Why does it matter? Before answering any of these questions, one needs to understand how credit cards work. So let’s dig into the details.

First, what is a credit card? These pieces of plastic extend a short-term credit line to the person carrying the card. The person using the card must make timely payments on their balance (the portion of a credit limit that is still outstanding). Unfortunately, not all people have the financial discipline to avoid running up large balances and racking up credit card debt. There is a startling amount of Canadian debt related to things like mortgages and credit cards—thus emphasizing the importance of using credit cards wisely.

To answer the question, which is also the title of this post, no, Canadian credit cards do not work differently from those worldwide. Thus, their users need to be wary of the following information to benefit them and avoid credit card debt.

Avoid Compounding Interest

Compound interest is a term related to interest that describes how interest charges are assessed when calculating the new balance of an account. This means that not only are credit card users charged interest on their purchases, they’re also charged interest on the previous total balance!

In the case of a credit card, the total balance consists of both purchases and interest charges. 

For instance, if a credit card has a 25 percent interest rate and its user purchases something for $1,000, the new balance for the next billing cycle would be $1,025 instead of just $1,000. This means that the 25 percent interest is included in calculating the new credit for this purchase and any previous purchases made on the card.

This is aside from the fact credit card users have to pay an APR, which is another expense on their credit card debt.

Know What an Annual Percentage Rate (APR) Is

APR stands for “annual percentage rate,” the amount of interest a credit card balance will accumulate over a year. For example, if one’s APR is 25 percent and has a balance of $4,000, users would expect to pay $1,000 in interest by the end of the year.

However, APR is a bit more complicated because it can be compounded daily, semi-monthly, monthly, or semi-annually depending on the lender. Most credit cards compound interest daily. That means that while the total interest charged would equal 25 percent over a year, a small part of that is applied every day.

The formula for determining daily interest is to take the APR and divide it by 365 (the number of days in the year—though some lenders base it on 360 days). So, the daily interest on a 25 percent APR would be about 0.0685 percent. Applied to a $4,000 balance, that’s about $2.74 dollars a day. A user pays nearly $3 on top of the amount spent on credit card debt.

Avoid Credit Card with Debt Helpers

If one has an expense that can be paid for via cash, shell out paper money instead of paying for it with a piece of plastic. If they can’t afford to buy the item yet, it’s much better to save up for it or buy a cheaper version. Minor expenses are not worth getting into debt, especially one that increases the more a credit card is used.

Get customized credit card debt solutions for all Canadians from Debt Helpers today! We provide various consulting services and debt solutions designed to help customers reach their goal of becoming debt-free. Get out of debt now!