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Credit Cards: Understanding How They Work to Avoid Costly Mistakes

Credit cards are convenient financial tools. They allow you to make purchases, build a credit history, and access rewards programs. But they also come with some of the highest interest rates in the market, and if not used wisely, they can lead to significant long-term debt. To protect your financial well-being, it’s essential to understand how credit cards work, how interest is charged, and what recent legal changes mean for consumers in Quebec.

Credit cards charge the highest interest rates

Most credit cards carry an annual interest rate of around 19% or higher—especially on unpaid balances or cash advances. In comparison:
  • Mortgage loans usually range from 4% to 7%
  • Student loans often offer lower, subsidized or variable rates
  • Auto loans typically fall between 5% and 9%

This means that every unpaid dollar on your credit card costs you much more in interest than other types of loans.

Prioritize high-interest debt first

If you’re managing multiple types of debt, it's wise to prioritize paying off credit card balances first, because:
  • You’ll reduce interest charges faster
  • You’ll improve your credit utilization ratio, which helps your credit score

Paying off high-interest debt first gives you more financial breathing room and helps you regain control over your finances more quickly.

New Quebec law: 5% minimum payment now mandatory

As of August 1, 2025, Quebec law requires that the minimum monthly payment on all credit cards be at least 5% of the outstanding balance. This regulation has been phased in gradually since 2019:
  • 2019: 2% minimum
  • Annual increase of 0.5%
  • 2025: 5% minimum becomes the new permanent standard

Goal: Reduce long-term debt and protect consumers

The purpose of this law is to combat chronic overindebtedness, especially among consumers who used to make only minimum payments of 2% or 3%, leading to decades of repayment.

For example

A $3,000 balance paid off at just 2% per month could take over 20 years to repay and cost thousands of dollars in interest.

Best practice: Always pay your balance in full

Although the law enforces a minimum payment, that amount is not enough to stay out of financial trouble. The minimum is simply the threshold to avoid being in default—but interest continues to accumulate daily.

Why pay the full balance?

  • You avoid interest charges entirely
  • You maintain a strong credit score
  • You demonstrate positive credit behavior, which lenders reward

If paying in full isn’t possible, consider setting up a repayment plan, consolidating your debt with a lower-interest loan, or switching to a line of credit to reduce interest costs.

In Conclusion

Credit cards can be powerful financial tools—or expensive traps—depending on how you use them. Understanding that interest rates are significantly higher than other types of loans, and that 5% minimum payments are only a baseline, can help you make smarter choices. By paying off your balance in full when possible, and managing your debt proactively, you’ll maximize the benefits of your credit card—while protecting your long-term financial health.