Canada’s 10 Best Overall Credit Cards

Credit Cards: What You Need to Know

Why use a credit card?

You’ve probably heard that using a credit card is risky or bad for your financial well-being. That couldn’t be farther from the truth.

It’s true that credit cards give you the ability to spend money that you don’t have. Doing so is always a losing proposition, though. If you don’t pay your balance in full every month, you’ll be subject to sky-high interest rates exceeding 20%.

However, just because you can spend money you don’t have, that doesn’t mean you have to. As long as you’ve developed a healthy personal finance mindset, there’s no downside to having a credit card – you’ll have nothing to lose and everything to gain!

Here are some of the benefits of using credit cards responsibly, which you can’t get when you pay with other methods like cash or debit:

• You’ll earn gigantic rewards, easily achieving several business class flights or upwards of $1,000+ in cash back each year.
• You’ll build a healthy credit history, which can help you secure better terms if you ever need a larger loan for a mortgage or a business.
• You’ll get fraud protection on your spending accounts.

What should you look for in a credit card?

There are a number of factors that differentiate credit cards. You (probably) won’t get them all, so it’s important to know what you’re looking for before you apply for a new card.

The biggest variable is the type of rewards that the card earns. There are two basic categories:

• Cash back rewards are self-explanatory. Almost every credit card issuer has at least one product that earns cash back.
• Travel rewards are more complex, as each rewards program has different valuations and rules for how you can use your points.

Travel rewards are broken down further:

• Each bank offers an in-house rewards program. Some examples include American Express Membership Rewards, RBC Avion, and CIBC Aventura. Depending on the bank, these points can be used in a variety of ways, such as statement credit, travel bookings, merchandise, gift cards, or transferred to external programs. Generally, travel redemptions have the highest value.
• Many banks also partner with external loyalty programs and offer co-branded credit cards. These cards directly earn points for airline, hotel, and other partners like Aeroplan, Marriott Bonvoy, or Air Miles. Those points generally can’t be transferred and can only be used within their program, but they also tend to present the best opportunities for making redemptions above face value.

To earn rewards, there are two main components to look out for:

• Many credit cards have a welcome bonus, with spending requirements that you have to meet in order to earn extra points or cash back. Read the terms and conditions, and make sure that you apply for cards not only with a bonus that you want, but also with one that’s achievable for your spending habits and budget.
• On an ongoing basis, you’ll also earn rewards on everyday spending. Some cards award extra points for shopping at merchants in a specific category or industry, such as grocery stores, restaurants, or gas stations, or travel providers. Consider loading up on those cards for the categories where you tend to spend the most.

You’ll also want to look out for perks and benefits of being a cardholder. These might include things like insurance, lounge access, annual credits or vouchers, elite status, or roadside assistance.

There’s a wide range of annual fees on the market, ranging from cards with no annual fee (and basic benefits) to high annual fees (and premium perks). There can be good value on both ends of the spectrum for anyone, as long as the price you pay is worth it for the benefits you get year after year.

Additionally, many cards offer a “First Year Free” promotion – a great way to sample a mid-tier credit card and earn a solid chunk of rewards with no obligation for a long-term financial commitment on your part.

What’s the optimal strategy for credit cards?

More than just a vehicle for spending money, you should treat credit cards as an indispensable tool for earning heavily-discounted travel experiences.

While there’s still good value in cash back, credit card rewards are most useful for travel. Travel credit cards will likely form the backbone of your strategy for two reasons.

First, travel credit cards tend to have bigger bonuses. They generally target the luxury market more than cash back cards, with premium bonuses and perks accordingly.

Second, the cash cost of an equivalent experience is often ridiculously high compared to the face value of the points. While there can be some costs involved in earning points, such as credit card annual fees, those costs are still way lower than the price of paying your own way with cash outright. As such, you can often redeem your travel rewards for outsized value.

Credit card welcome bonuses are the foundation of your rewards. Simply put, you’ll earn many more points, and you’ll earn them much faster, than if you only focused on optimizing everyday spending.

Therefore, you’ll want to focus on applying for new credit cards as often as you can. However, it’s critical to make sure you have a plan to meet the minimum spending thresholds required to earn each welcome bonus, otherwise your annual fees will go to waste.

That said, some credit cards offer good long-term value as keepers. There are a variety of considerations that might compel you to keep a card for more than one year:

• It has strong everyday earning rates which you’re able to capitalize on whenever you’re not working towards a new signup bonus.
• It has perks that make it worth keeping in spite of the annual fee, such as annual credits, free nights, companion fares, predictable rebates, or insurance benefits for recent purchases or bookings you’ve made.
• By maintaining a longstanding relationship with a credit card issuer, they might be more likely to approve you for additional cards in the future.

While it would be nice to drill credit card rewards down to an exact science, the reality is that there’s no one-size-fits-all solution. Instead, there are a number of general principles to guide you depending on your circumstances.

First, consider your goals. Cash back won’t get you very far if you’re looking for First Class flights. Travel rewards aren’t much use if you aren’t a traveller. There are a lot of good credit cards out there, and just because we’ve ranked one highly doesn’t necessarily mean that it’s the best choice for you.

Second, consider your limitations. Credit card rewards aren’t quite as simple as free travel. If you’re trying to avoid high annual fees, or if you’re a low spender, you might prefer a slow-and-steady approach, rather than going after the biggest bonuses as fast as you can.

Additionally, other factors might come into play, such as having a lower income or a weaker credit history. Those challenges might rule you out from some lucrative rewards cards, at least in the short-term – although you’ll still be eligible for others.

Don’t miss our credit card filter, which is set up so that you can apply all sorts of personal goals and limitations as you navigate how they all compare.

Regardless, there are a few overarching tactics that are useful for anyone:

• Always pay your balance in full and on time. This helps you maintain low credit utilization (and a higher credit score). More importantly you’ll avoid accumulating any debt on your purchases, which would immediately wash away the value of the rewards you’ve worked so hard to earn.
• Keep old credit cards open, even if you don’t use them on a regular basis. It’s good for your credit file if you have longstanding accounts with a healthy record of on-time repayment. If possible, see if you can downgrade these cards to a version that has no annual fee.

Ultimately, no matter where you are in your credit journey, you want to maintain a healthy credit file today, so that you’ll be more likely to be approved for more cards (and the rewards that come with them) in the future. After all, credit card rewards are a marathon, not a sprint, and developing a long-term strategy can be very beneficial for anyone.

Frequently Asked Questions

Isn’t it bad for my credit score when I apply for a credit card?

Only temporarily, and the impact is negligible. In fact, long-term, your credit score will likely improve as you demonstrate the ability to repay and responsibly maintain many cards. You can read more in our Newbie’s Guide.

Will I lose my welcome bonus if I cancel a credit card after the first year?

No. However, you should keep each credit card open for at least six months – it’s better for your credit report and for your relationship with the bank.

Can I transfer points from Program X to Program Y?

Probably not. Banks definitely don’t have a mechanism to transfer points to a competitor.

Airlines and hotels have some partnerships, but still very few. You’ll find more ways to redeem points for a partner’s product than to transfer points to a partner’s program.

That’s one of the reasons why we highly covet American Express Membership Rewards, RBC Avion, and Marriott Bonvoy points – transferable rewards currencies are rare in Canada, and those ones all have several valuable and interesting transfer partners.

Can I use my travel rewards for cash back?

Many rewards currencies can be used for statement credit or gift cards, but usually at a lower value than what you’d get for a travel redemption.

What’s the difference between air miles and Air Miles?

Your friend casually tells you: “I collect air miles.” When the words are spoken, it’s not always clear what they mean.

AIR MILES, as a proper noun, refers to a Canadian rewards program. Despite a travel-oriented name, it’s more of an all-around shopping program. You’ll primarily earn and redeem AIR MILES at retail partners. There are some travel sweet spots, but generally it’s not a useful program for scoring aspirational First Class experiences around the world.

It’s possible that your friend isn’t being specific about which rewards program they’re collecting. Some people use the generic phrase “air miles” interchangeably with words like points, rewards, or miles.

Often, the travel rewards attached to a specific loyalty program, such as Air Canada’s Aeroplan or American Express Membership Rewards, have much different uses than AIR MILES.

If your friend is simplifying it for you, bring up your knowledge and talk shop. Or if they don’t actually know what type of travel rewards they’re earning, send them to Prince of Travel and we’ll straighten them out!