Understanding your credit card(s)

The credit card system in France is totally different from the one in Canada or the US. When I arrived here, it took me a while to understand how a credit card works in North America.

Basically, when you make a purchase or take a cash advance, the amounts are charged to your card. Each month, you receive a statement and a bill. You have to pay a minimum amount by a certain date. If, like me, you pay the full amount each month, you have nothing to be concerned about.

I wasn’t always able to pay the full balance on my credit cards. The main consequence was that I was charged hefty interest on both the outstanding amount and on new charges. Most credit cards have a 20% to 30% interest rate. Different types of charges can carry different rates. For example, cash advances usually have a higher rate.

When you don’t pay the full balance, you also loose the grace period on purchases. When you pay the full amount on time, credit card companies don’t charge interest on new purchases. If you don’t, interest will start accumulating on each new charge and until you pay your balance in full. Cash advances and transfer balances never qualify for the grace period.

Interests are calculated either by using the “daily balance” or “the average daily balance” methods. I won’t elaborate on these, as the result is pretty much the same.

Having a low-interest credit card doesn’t make much sense, in my opinion. The credit card company will usually charge you a yearly fee to make-up for the low interest. You should not pay to have a credit card; it is money down the drain.

Your payment is also applied a certain way and each credit card has different rules. It may be applied to interest and fees first, purchases second, then cash advances and balance transfers. In a cash grab manner, a credit card company can choose to apply your payment to charges with the lowest interest first, letting higher interests accumulate.

The best way to understand how your own credit card works is to read the terms and conditions of the card or/and call the credit card company.

A credit card is a necessary and great tool to build your credit history and score, if used correctly. There are a few pitfalls you need to avoid:

  • Only making the minimum payment: you will pay a ton of interests
  • Constantly requesting increases to your credit limit: this impacts your credit score and can be a red flag for lenders
  • Living a borrowed lifestyle: this is how most people get into debt in the first place. Don’t treat the credit extended by a credit card company as your own, personal money. It is definitely not!

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