For most people, applying for a credit card is usually a first introduction to the world of borrowing, and it’s an important one.
Credit cards are excellent tools when used correctly, however it’s important to understand how they work before you get one.
1. What Can a Credit Card Do for You?
If you like to ensure all your debts are paid by month’s end, applying for a credit card might seem unnecessary.
Using a credit card to buy something when you’re perfectly capable of paying for it yourself might seem counterintuitive, but there are benefits.
Credit cards can be good for emergencies if your savings are slim to none.
Your car breaks down suddenly, and now you need a new transmission.
Credit cards can help with building your credit when they’re used wisely.
Regular payments are reported to credit rating agencies – such as Equifax or TransUnion – and contribute to your credit score.
Credit cards can also protect you better than paying with cash or a debit card.
Most providers offer great fraud protection if your card is used nefariously.
2. How Does Your Credit Score Work?
It’s almost impossible to talk about applying for credit without talking about credit score.
A three-digit score, generally ranging from 300 to 900, helps determine your creditworthiness in Canada.
Information in your credit report – a record of your payment history, amount of debt, and the length of credit history – is calculated to determine your score
A credit score provides potential creditors, lenders, and other interested parties a way to judge how risky you are as a borrower.
It’s only one of several pieces of information to make lending decisions, but it will play a significant role in deciding what kind of card you can get.
Having a credit card is an important credit builder and making regular payments, settling the balance, and age of account all contribute to that process.
3. What Kind of Credit Cards are Out There?
There are over 76 million Visa and Mastercard cards in circulation, and chances are high there’s a type that’s right for you.
It depends on why you’re looking for a card in many cases.
Almost every institution offer cards for people at every stage of life and in almost every credit situation.
Secured credit cards are generally used by sub-prime borrowers or those with limited or poor credit.
This product requires the cardholder to provide a deposit on the card, and the amount, and in some cases more, becomes the holder’s credit limit.
In many cases, payments are reported to one of the credit bureaus, which is helpful when you’re trying to build credit history.
Your bank or credit union likely offers a student or a no-fee credit card option for young people applying for the first time.
Most of the time, these cards offer a lower credit limit – often $500 to $1,000 – and higher interest rates.
As the name suggests, no-fee credit cards are introductory products that are perfect for building credit while saving you a few bucks on annual fees.
There are also low-interest credit cards available for those who intend on carrying a balance from month to month.
While it’s not ideal to carry balances on credit cards, it may be necessary to get by.
If you regularly carry a balance on your credit card, you want to ensure you’re paying as low of an interest rate as possible.
Rewards credit cards are good options if you have a more robust credit score and use them for your day-to-day spending.
These programs are often geared towards specific niches like cashback, grocery, travel, or gas stations rewards.
If used strategically, these are great financial tools and can help you save cash.
Exclusive credit cards are usually designed for specific demographics, such as those earning a certain amount.
These products typically include elite airport lounges, excellent cash back rewards or points, and generous travel benefits.
4. How do I Choose the Right Credit Card?
With the number of credit cards, narrowing the choices might feel impossible.
The first step is choosing what kind of credit card you want – such as a secured, unsecured, prepaid, cash back, rewards, low-interest, or a charge card – based on your goals and financial situation.
Once that’s done, you have to ask specific questions
Student, Secured & No Fee Cards
Does this card report my payment history to a credit bureau if it’s secured?
Many don’t, so it’s essential to do your research.
If there is an annual fee, how much is it?
There isn’t usually an expense associated with these cards, but it can happen if you have poor credit.
If you have a student or introductory card, can you easily upgrade to a better card later?
Hopefully, your lender can offer this option.
However, you might want to keep your student card even if you get a new one.
Older accounts are looked upon more favourably when calculating credit scores.
Low-Interest Cards
If the credit card provider offers a promotional 0 percent interest rate, how long does the APR (annual percentage rate) promotion run, and what is the ongoing APR?
This will help you understand if you’ll be able to pay off your debt before the regular interest rate kicks in.
What is the card’s balance transfer policy?
If you were hoping to pay off a high-interest purchase, a balance transfer usually comes with certain conditions so be aware of them.
Rewards and Cashback Cards
How do I spend my money?
When looking for a rewards card, look for ones that work best with your lifestyle.
Make sure the benefits you receive are the ones important to you – that might mean gas dollars or travel points.
How complicated is the card’s loyalty or bonus program?
Not all credit card loyalty programs are created equal.
If you want to avoid travel date blackouts, tiered rewards systems, spending caps, and other restrictions, look for cards that offer flat-rate cashback rewards.
How fast will I earn rewards, and what are they worth?
This can be difficult to determine, especially considering how complex some of these programs can be.
You can likely find a comparison site to help you sort out the best fit for you.
5. What Qualifications Do I Need to Get a Credit Card?
These will be the minimum requirements for obtaining a credit card in most cases.
Each lender may have conditions beyond what’s listed here.
- Depending on what province you live in, you will need to be 18, 19 or older to apply for a credit card
- Must be a permanent resident or a Canadian citizen
- Have a social insurance number
- A good credit score – the requirement will depend on the card
- You must have a fully discharged bankruptcy to apply for an unsecured card
6. Where Do I Shop for A Credit Card?
When looking for a credit card, most people first look towards their financial institutions for offers.
Sometimes this works out well, as banks and credit unions often offer incentives to keep their customers’ business in-house.
However it’s best to first comparison shop online, and understand offerings from all financial institutions.
There’s no harm in banking at RBC and having a BMO credit card.
7. How Can I Improve My Credit Card Application?
Generally, lenders are risk-averse organizations that favour stability, consistency, and conservative action.
Improving your credit card application may take time and conscious effort on your part, but it’s not all bad.
Cultivating the habits you need for a successful credit card application will help you succeed in other financial life areas.
Some steps you can take:
- Make total and regular payments on all your credit accounts
- Try to maintain consistent employment
- Pay off any outstanding loans and balances to decrease your credit utilization
- Look for ways to increase your income
- Do not apply for too many credit cards at one time because your credit score will suffer
If you’re not able to get the credit card you want the first time you apply, spend some time ensuring the above is in check.
Frequently Asked Questions
- Can I get a credit card at 18?
- How can I get a credit card immediately?
