With 72 percent of Canadians owning at least one credit card, it’s clear that these small pieces of plastic play a significant role in our daily lives. However, the true potential of credit cards often remains untapped, and many cardholders are unaware of how to fully leverage the benefits of the cards in their wallets.
By better understanding the credit cards they have, consumers can maximize the value of their cards and transform them from mere conveniences into powerful financial allies.
Understanding the different types of credit cards
Choosing the right credit card depends on understanding your spending habits, financial situation, and personal preferences. It’s not about finding the ‘best’ credit card in the market, but rather the best one for you.
No two credit cards are exactly alike. Credit cards differ vastly in rewards, costs, and purpose. Here’s a detailed breakdown of the most common types of credit cards.
Travel credit cards
Travel credit cards are designed for frequent travelers, rewarding cardholders with points or miles that can be redeemed for travel-related expenses like flights, hotels, and car rentals. Some offer perks like travel insurance coverage, free checked bags, priority boarding, and access to airport lounges.
The key is to find a card that aligns with your travel habits - do you often fly with a particular airline or stay at a specific hotel chain? If so, a co-branded card might provide the most value.
Co-branded credit cards, partnered with specific brands like airlines or hotels, offer rewards and perks tailored to frequent customers of those brands. For instance, a card co-branded like Aeroplan with your favorite hotel might offer double miles on your stays and additional benefits like room upgrades or late checkouts.
Cash back credit cards
Cash back credit cards offer a rebate on the money you spend. This rebate is usually a percentage of the amount spent and some premium Cash back cards will even offer a welcome bonus of up to 10% cash back for a limited time.
Some cashback cards offer a flat rate on all purchases, while others offer higher rates on specific categories like groceries, gas, or dining. To maximize the benefits, look for a card that rewards the categories you spend the most in.
Related: How do cashback rewards work on a credit card?
Balance transfer credit cards
Balance transfer cards are a great tool for those carrying high-interest credit card debt. These cards allow you to transfer existing credit card balances to a new card that offers a low or 0% introductory interest rate for a set period of time. This can help you save on interest and pay off your debt faster.
However, it’s crucial to pay off the balance before the promotional period ends, as the interest rate will sometimes jump to a low, but significantly higher interest rate.
No-fee credit cards
As the name suggests, no-fee credit cards do not charge an annual fee. They are a good choice for those who are cost-conscious and prefer not to pay a yearly fee for their credit card.
There are also other types of credit cards tailored to specific needs or priorities. For example, most student credit cards offer no annual fees.
Low-interest credit cards
Low-interest credit cards offer a lower interest rate compared to other cards. They are a good choice for those that carry a balance on their card. There are cards on the market that offer interest rates on purchases as low as 8.99% vs. the average market rate of 20.99%.
Let’s consider two hypothetical credit cards:
- Card A has a lower annual percentage rate (APR) of 8.99%. If you carry a balance of $1,000 on this card for a year, you will pay $89.90 in interest.
- Card B has a higher APR of 20.99%. If you carry the same balance of $1,000 on this card for a year, you will pay $209.90 in interest.
Other credit card types:
Business credit cards: These cards offer benefits and features that are tailored to the needs of business owners, such as expense tracking for bookkeeping and higher credit limits.
Secured credit cards: These cards require a security deposit which typically acts as your credit limit. They are a good choice for building or rebuilding credit.
Prepaid credit cards: Prepaid credit cards, which require you to load money before use, are ideal for controlling spending and for those who don’t qualify for a regular card. Unlike debit cards that are linked to your bank account, prepaid cards don’t help build credit.
How to determine the value of a credit card
According to Givex Corp.’s 2023 Consumer Survey, 57% of Canadians participate in two to four loyalty programs, with one in every five Canadians is enrolled in at least five loyalty programs.
The first step in determining the value of a credit card is to understand the rewards program and benefits the card offers. This could be anything from cash back, points, or miles to benefits like insurance coverage, airport lounge access, or other exclusive offers. It’s important to consider how these rewards align with your spending habits and lifestyle.
Other important things to consider are:
Annual fees: Some cards charge an annual fee, which can range from a few dollars to several hundred dollars a year. Weigh the cost of the annual fee against the benefits and rewards the card offers to determine whether it’s the right card for you.
Credit limit: This is the maximum amount you can owe on the card. A high credit limit can be beneficial if you regularly make large purchases, and it can also help your credit score, as long as you don’t carry a large balance and keep your credit utilization low.
Earn rates: This refers to the number of points or the percentage of cash back you earn per dollar spent on the card. Most rewards cards offer different earn rates for different types of purchases.
For example, you might earn 2 points per dollar spent on travel and 1 point per dollar spent on all other purchases. Some cards also offer a sign-up bonus that lets you earn many points at once, often upon getting approved for the card.
Foreign transaction fees: If you frequently travel abroad or make purchases in foreign currencies, you’ll want to avoid foreign transaction fees and only have the exchange rate apply.
Interest rate: If you carry a balance on your card, the interest rate is an important factor to consider. A lower interest rate can help pay off any credit card debt faster. However, if you pay off your balance in full each month, the interest rate may be a less important factor to consider.
What is the RATESDOTCA ‘Best of Finance’ methodology?
The ‘Best of Finance’ (BoF) methodology is a systematic approach used to evaluate and rank financial products, such as credit cards. It’s designed to provide a comprehensive and objective assessment to help consumers make informed decisions.
The methodology goes beyond merely calculating and measuring rewards. It considers various criteria based on the category. These criteria include the value of rewards and welcome offers, benefits, insurance coverage, flexibility in redeeming points, eligibility, and interest rates.
When determining the best credit cards per category, these criteria will have different weights. For instance, to figure out what the best travel card is, the BoF imposes greater emphasis for aspects such as insurance coverage. The “best travel card” category will prioritize lower interest rates.
The weighting will vary based on the customer’s needs.
To determine which card has the best rewards, RATESDOTCA BoF methodology assumes that a cardholder spends $2,000 a month, broken down into the following categories:
- Groceries:$500.00
- Gas: $250.00
- Drugstore: $150.00
- Travel: $200.00
- Restaurants:$250.00
- Entertainment: $150.00
- Recurring bills:$300.00
- Retail store: $100.00
- Local transit:$50.00
- Miscellaneous: $50.00
BoF in action: Travel credit cards
According to our best of finance methodology, the best credit card for travel in 2024 is CIBC Aventura® Visa Infinite Card.
With this card, cardholders:
- Earn two points for every $1 spent on travel.
- Earn 1.5 points for every $1 spent at eligible gas stations, grocery stores and drugstores.
- Earn one point for every $1 spent on all other purchases.
Generally, with this card, that looks like the following:
- Travel = $200 x 2 points (400 points)
- Groceries, drugstore and gas = $900 x 1.5 points (1,350 points)
- All other purchase categories = $900 x 1 points (900 points)
However, the points represent different values based on what you put them towards – once you figure out how many points you could stand to earn, you’ll want to reverse that math and how much those points are worth.
This is a travel card, so cardholders can get the most value out of their points from travel. However, they can also redeem their points on gift cards, charitable donations, and statement credit, at lower tiers. For the sake of simplicity, here’s how these points are worth in dollars when converted to travel and statement credit.
In general, CIBC Aventura Rewards convert to $2.13 cents per point applied to travel. That means, if you took your annual 31,800 points and applied them to a flight, it would equal to $677.34.
If instead, you wanted to use your accumulated points to pay off your credit card bill, the points redemption is $0.83 cents per Aventura point. That equals $263.94 in statement credit.
Terms and conditions apply to CIBC Rewards.
BoF in action: Cashback credit cards
The value you can generate from a cashback card is generally easier to calculate – after all, there are no points to convert. Let’s put forward the 2024 best overall credit card for cashback as an example: SimplyCash® Preferred Card from American Express.
If you spend $750 on gas and groceries, and $1250 on the remaining spending across all categories above, the average Canadian could earn up to $660 in rewards in the first year following a reward structure of:
- Earn 4% on gas and grocery purchases.
- Earn 2% cash back on all purchases.
Here’s a breakdown of your accumulated points:
Gas and grocery purchases = $750 x 4% ($30 in cashback value)
All other purchase categories = $1,250 x 2% ($25 in cashback value)
With the SimplyCash® Preferred Card from American Express, you can also earn a statement credit of $40 each month when you make purchases worth $750 on your card. This means you could accumulate up to $400 in statement credits within the initial 10 months.
Are no-fee credit cards always the best value?
No-fee credit cards can be a great choice for many people, especially cost-conscious individuals who prefer not to pay a yearly fee for their credit card. However, they may not always offer the best value. Here’s why:
They offer lower rewards: For someone who uses their credit card for most of their daily expenses, a card with an annual fee but higher rewards might be more beneficial. The rewards they earn could easily offset the cost of the annual fee.
For example, if a card offers 2% cash back and has a $100 annual fee, spending $5,000 on the card in a year would earn $100 in cash back, effectively making the annual fee worthwhile.
Fewer benefits: For frequent travelers, a card with an annual fee that offers comprehensive travel insurance, airport lounge access, and higher rewards rates for travel-related expenses could provide more value than a no-fee card. These benefits could save the cardholder significant money on travel costs, making the annual fee worthwhile.
For example, if a cardholder travels frequently and uses airport lounges, the cost of lounge access alone could exceed the annual fee of a card that includes lounge access as a benefit. Similarly, the cost of buying travel insurance separately could be higher than the annual fee of a card that includes comprehensive travel insurance.
Read more: Are credit cards with annual fees worth it?
Managing credit card debt in Canada
Canadians are among the most indebted individuals globally, with a significant portion of that debt stemming from credit cards. According to JD Power, 34% of all cardholders maintain revolving debt on their credit cards, and (52%) are classified as financially unhealthy.
Credit cards, while convenient and potentially rewarding, can lead to substantial debt if not managed properly. Therefore, choosing and using credit cards should never be taken lightly.
If you find yourself juggling more credit cards than you can manage, don’t hesitate to act. It’s better to close some accounts rather than risk falling further into debt. However, closing a credit card account could temporarily lower your credit score, as it reduces your available credit. So, it’s a good idea to pay down your balances before closing accounts.
Use the snowball method
One effective strategy for paying off credit card debt is the snowball method. This approach involves paying off your credit cards starting with the smallest balance first while making minimum payments on the other cards. Once the smallest balance is paid off, you move on to the next smallest, and so on. This method can help you reduce your debt load with the least amount of damage to your finances.
Rebuilding your credit
If you’re working to rebuild your credit, consider switching to a prepaid card or a secured credit card. Prepaid cards allow you to load a specific amount of money onto the card, helping you control your spending.
Secured credit cards require a cash security deposit, which typically determines your credit limit. Both options can be effective tools for building or rebuilding credit, as they encourage responsible spending habits.
Read more: Secured credit card vs. prepaid credit card: Which is right for you?
Remember, managing credit card debt is all about taking control of your finances. With careful planning and disciplined spending, you can reduce your debt and work towards a more secure financial future.
There’s more to a card than what you spend on it
In addition to cashback and other rewards, many credit cards offer additional benefits that can enhance their value. Welcome bonuses are a significant factor to consider when choosing a credit card. These bonuses, often in the form of points or cash back, can provide substantial value, especially if you’re planning a big purchase or a trip.
Many Canadian credit cards also offer a range of travel insurance coverage, including trip cancellation, trip interruption, travel medical, and car rental insurance. These benefits can provide significant savings and peace of mind when you’re travelling by air or by car.
Browsing credit cards can be overwhelming. However, if you understand your shopping habits and stay true to your priorities, the right credit really pays off in the long run (in more ways than one!).
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