As more of us understand how things operate in the credit card industry, card sponsors have come out with even more sophisticated products. From Balance Transfer cards, Travel Rewards cards, Gas Point and Air Miles cards, to Low Interest, No Fee, Prepaid, Secured, Cash Back and Retail Points cards. While the basic principles are the same – Use it now and pay later – each of these choices are slightly different from one another.
With so many choices available, the question is: How do you choose the one that’s right for you? Read on to learn more about some of the most common types of credit cards, and how to determine which one is best for your needs.
Making Sense of It All
As indicated in the intro to this post, the sheer number of credit card choices can overwhelm even the most financial-savvy amongst us. So how do you go about making the right choice? And the answer involves a 2-step process:
- Firstly, you need to take a close look at your financial standing, and your lifestyle, and understand what makes sense for you/your family
- Then, you need to review the features of each of the credit products out there, and confirm whether they meet your lifestyle needs
It’s really that simple!
Let’s start making sense of it all for you by breaking it all down. We’ll start by briefly explaining some of the most common credit cards available to Canadians, and highlight why they might appeal to you.
Balance Transfer Credit Cards
If you currently have several high-interest credit cards, or are carrying high-interest debt (like Car loans or a Mortgage), then a Balance Transfer Credit Card might be something to consider. These cards allow you to consolidate multiple credit vehicles into a single, lower-interest card. They offer introductory low rates that you can leverage to quickly pay off your debt.
You can check out our full length post on taking advantage of balance transfer credit cards
Cash Back Credit Cards
Canadians who would rather see their purchases result in “hard cash”, often lean towards Cash Back credit cards. Depending on which issuer you go with, these cards could result in you receiving a percentage (anywhere between 0.5% to 2%) of each transaction value back in monetary rewards – not in points. The cash is either paid to you, or used as a credit against your balance.
No Annual Fee Credit Cards
If, like most Canadians, you too are fed-up with being nickel and dimed for every financial product you own, then a No Annual Fee card might be more to your taste. With No Fee cards, you are never charged to renew your card each time it expires. However, you should understand that nothing comes for FREE. With these “no fee” cards, comes higher interest rates (relative to fee-based cards) on outstanding balances.
If you always pay your balance in full each month, then you should do just fine with a No Annual Fee card.
Low Interest Credit Cards
Not all Canadians can pay off their credit card balances in full every month. If you are one of them, and carry a balance from month-to-month, then the best way to cushion the impact of carrying a balance is to opt for a Low Interest credit card.
Things to watch for: Typically, your interest rate will be much lower, compared to a No Annual Fee card, when there is an annual fee associated with your low interest card. You need to do the math to decide if the cost of the annual fee outweighs the interest charges associated with such cards.
Rewards Credit Cards
If you are comfortable paying an annual fee for your credit card, then you may as well shop for one that rewards you with some great value in return. Rewards Credit cards do just that. Whether it’s rebates on travel insurance, points that can be redeemed against purchase of electronic goods, hotel and car rental benefits or access to Airport VIP lounges – the rewards earned are as varied as you can think of.
There may also be no-fee rewards cards. Choosing the right one however depends on your lifestyle. If you travel frequently, then perhaps one that offers Frequent Flyer, Hotel or Car Rental rewards is best. Cards that offer great grocery-related rewards may suit Canadians with larger family unit sizes.
Secured/Prepaid or Charge Cards
If you are one of the many Canadians struggling with poor credit, you might still get access to something that looks and works similar to (but not the same as!) a Credit Card. These are called Charge, Prepaid or Secured cards. You can pre-pay a specific balance against the cards, and then use them just as you would a normal credit card. Once the balance has been used up, you can top-up the card with another installment.
Prepaid/Secured cards are a great way to rebuild your credit, or to get back into learning how to responsibly manage credit.
Student Credit Cards
For young Canadians studying, or those working part-time while completing a course of studies, a Student Credit Card is ideal. These cards are a great way for younger card holders to learn valuable money-management lessons, while also giving them a head start on building their credit history. Many Canadian educational institutions now work with major financial institutions and credit card issuers to offer their constituents a variety of no-fee, low-interest and balance transfer student cards.
And the Winner Is…?
…the one that works best for you!
If you’ve done as suggested in the earlier part of this post, and reviewed what your lifestyle expectations are from a credit card, then you should easily be able to pick a credit card that’s right for you from amongst the 7 options highlighted above.
When making your decision, you may have to:
- Weigh cost (e.g. annual fees, interest rates) versus benefits (rewards, cash back percent)
- Evaluate convenience – taking into account how widely-accepted the card is
- Keep your personal credit situation into account
- Decide whether you wish to pay your balance in full (highly recommended) or pay the minimum due each month (not recommended)
Very often, your choice of a credit card might also be dictated by an existing relationship that you may have with a financial institution. For instance, most banks will offer you higher pre-approved credit balances or pre-qualify you for lower interest rates if you have been a long-standing client in good standing.