F. Financial Literacy · Money and Finances: Payments, Financial Plans, Budgets, Interest and Smart Spending

Comparing Credit Cards and Consumer Contracts

F1.6 A1About 50 minutes

Learning goals

I can explain how credit cards work, including interest, the grace period and minimum payments.
I can compare credit cards using interest rates, annual fees and rewards for different spending habits.
I can compare the total cost of consumer contracts, like phone plans and gym memberships.
I can choose the best value for a scenario and explain what fine print to check.

Words to know

credit card
A card that lets you borrow money to pay for things now and pay the card company back later.

annual fee
A yearly charge some credit cards have just for having the card.

grace period
The time after a statement when you can pay the full balance on new purchases without paying interest.

minimum payment
The smallest amount you must pay each month. Paying only this means interest is charged on the rest.

rewards
Cash back, points or travel credits given for using a card.

consumer contract
A legal agreement to buy a product or service, often for a set length of time, like a phone plan or gym membership.

cancellation fee
A charge for ending a contract early.

Remember from Grade 7

In Grade 7 you saw that credit cards often charge high interest (around 20% a year) on unpaid balances, and that paying only a small amount each month costs a lot.

Now you'll compare credit cards with different rates, fees and rewards, and compare contracts like phone plans, to find the best value for different people. In Canada you generally need to be an adult (the age of majority, which is 18 in Ontario) to get your own credit card, but learning to compare them now will help you decide well later.

How a credit card works

Each month you get a statement showing what you spent and the balance owed.
If you pay the full balance by the due date, you usually pay no interest on purchases. In Canada, credit cards must give a grace period of at least 21 days on new purchases when the balance is paid in full.
If you pay less than the full balance, interest is charged on what's left, at a high yearly rate.
You must pay at least the minimum payment, or there are fees and harm to your credit history (a record lenders check before lending you money later).
Cash advances (taking cash out with a credit card) usually start charging interest right away.

What to compare

Interest rate: matters most if you might carry a balance.
Annual fee: paid every year whether you use the card or not.
Rewards: cash back or points. Worth it only if they're more than the fee.
Other incentives: welcome bonuses, low introductory rates (check what the rate becomes later), insurance or travel perks.

Card	Annual fee	Interest rate	Rewards
A	$0	20.99%	0.5% cash back
B	$120	20.99%	2% cash back
C	$29	12.99%	None

Three example credit cards (made-up cards with example numbers).

Worked example

Example 1: Someone who pays in full every month

Daniel spends $500 a month on his card and always pays the full balance. Which card gives him the best value for a year?

Yearly spending: 500 × 12 = $6 000. No interest, because he pays in full.
Card A: 0.5% of 6 000 = $30 back, no fee. Net: +$30.
Card B: 2% of 6 000 = 120 back, minus 120 fee. Net: $0.
Card C: no rewards, $29 fee. Net: −$29.

Card A. For someone who pays in full and spends this amount, a low rate doesn't matter and the high-reward card's fee cancels out its rewards.

Worked example

Example 2: A bigger spender

Farah spends $1 200 a month and pays in full. Which card is best? At what monthly spending do Cards A and B give the same value?

Yearly spending: 1 200 × 12 = $14 400.
Card A: 0.5% × 14 400 = $72.
Card B: 2% × 14 400 = 288, minus 120 = $168.
Card C: −$29.
Same value: B gives 1.5% more back than A, so they're equal when 1.5% of yearly spending = 120. Spending = 120 ÷ 0.015 = $8 000 a year, about $666.67 a month.

Card B for Farah. Above about $667 a month, Card B's extra rewards beat its fee.

Yearly value (rewards minus fees) for someone who pays in full. Card A wins at low spending, Card B wins above $8 000 a year, and Card C is always below zero for this person.

Worked example

Example 3: Someone who carries a balance

Grace spends $300 a month, but usually owes about $2 000 on her card all year. In a simplified example, her yearly interest is balance × rate. Which card costs her the least?

Card A: interest 0.2099 × 2 000 = 419.80. Rewards 0.5% × 3 600 = 18. Cost: 419.80 − 18 = $401.80.
Card B: interest 419.80 + fee 120 = 539.80. Rewards 2% × 3 600 = 72. Cost: 539.80 − 72 = $467.80.
Card C: interest 0.1299 × 2 000 = 259.80 + fee 29 = $288.80.

Card C, the low-rate card, saves Grace over $100 a year compared with Card A. If you carry a balance, the interest rate matters most. Even better: make a plan to pay the balance down.

Worked example

Example 4: Comparing phone contracts

Three ways to get a phone and service for 2 years (example prices, before tax):

Option 1: buy a new phone for $600, plus a $35/month plan.
Option 2: $0 down, $62/month for 24 months (phone included).
Option 3: buy a used phone for $250, plus the $35/month plan.

Option 1: 600 + 35 × 24 = 600 + 840 = $1 440.
Option 2: 62 × 24 = $1 488.
Option 3: 250 + 840 = $1 090.

Option 3 costs the least overall, if the used phone works well. Option 2 has the lowest cost up front but the highest total. Always compare the total cost over the whole contract.

Two-year totals for the three phone options. Option 2 has nothing up front but the tallest total; always compare the whole contract.

Worked example

Example 5: A gym membership

A gym offers $49.99/month, cancel any time, or a 12-month contract at $39.99/month plus a $59 sign-up fee, with a $150 fee to cancel early. Compare if you stay 12 months, and if you quit after 5 months.

Stay 12 months: monthly 12 × 49.99 = $599.88. Contract 59 + 12 × 39.99 = 59 + 479.88 = $538.88.
Quit after 5 months: monthly 5 × 49.99 = $249.95. Contract 59 + 5 × 39.99 + 150 = 59 + 199.95 + 150 = $408.95.

The contract saves $61 if you really stay all year, but costs $159 more if you quit after 5 months. The best choice depends on how sure you are.

Read the fine print

Before signing any contract or applying for a card, check:

The total cost over the full term.
Fees: sign-up, annual, late payment, cancellation, going over a data limit.
Introductory offers: what happens when they end?
Automatic renewal: does it keep charging after the term?
What happens if you miss a payment?

If something isn't clear, ask, and don't sign until you understand it.

Know yourself

The best card or contract depends on your habits. Be honest: Do I always pay in full? Will I really go to the gym? Self-awareness is a money skill.

Just for fun

Why is it impossible to hide from credit card interest?

It always finds the balance you left behind.

Hands-on activity

Contract comparison with a grown-up

You need: a grown-up, a calculator, and information about a real subscription or contract your family has or is thinking about (a phone plan, internet, streaming service, music lessons, a sports club). Online plan comparison pages also work.

Find two or three options for the same service.
For each, list: monthly cost, up-front cost, length of contract, cancellation fees and any extras.
Calculate the total cost for 1 year and for the full contract.
Ask your grown-up what fine print they check. Look for automatic renewal or price changes after a promotion ends.
Choose the best option for your family's situation and explain why in 2 or 3 sentences.

What to look for: totals calculated over the same time period, fees included, and a reason that goes beyond the lowest monthly price.

Your turn

If you pay your credit card's full balance by the due date, how much interest do you usually pay on purchases?

Someone spends $400 a month and pays in full. Find the yearly value of Card A ($0 fee, 0.5% back) and Card B ($120 fee, 2% back).

Someone often carries a balance. Which feature matters most: rewards, the annual fee, or the interest rate?

A phone costs $0 down and $58/month for 24 months. What is the total?

A streaming service costs $16.99/month or $169.90/year. How much does the yearly plan save?

Name three things to check in the fine print of a contract.

Why can a 0% introductory rate for 6 months be risky?

More practice: warm-up

What is an annual fee?

2% cash back on $1 000 of spending is how much?

A contract costs $40/month for 12 months. What is the total?

What is a minimum payment?

Which is usually better for someone who pays in full every month: a card with no annual fee or a card with a low interest rate and a fee?

More practice: on your own

Card A ($0 fee, 0.5% back) or Card B ($120 fee, 2% back): which is better for someone who spends $900 a month and pays in full? By how much?

In a simplified example, someone carries a $1 500 balance all year. Compare yearly interest at 20.99% and 12.99%.

Gym: $45/month no contract, or $420 for a full year paid up front. How many months must you go for the yearly plan to be cheaper?

Internet: Plan X is $55/month for the first 6 months, then $80/month. Plan Y is $70/month always. Which costs less for one year?

A card offers a $100 welcome bonus if you spend $1 500 in the first 3 months. Why might this be a bad deal for some people?

Challenge

A card has a $99 annual fee and gives 1.5% cash back. Another has no fee and 0.5% back. Find the yearly spending where they're equal. Which is better for someone spending $700 a month?

Phone Option A: phone $900 up front + $40/month. Option B: $0 down, $77.50/month for 24 months (phone included). Option C: keep the old phone and switch to a $30/month plan. Find each 2-year total. Which would you choose and why?

A store offers "no interest for 12 months" on a $1 200 couch. The fine print says that if it isn't fully paid by month 12, interest of 29.99% a year is charged back to the purchase date. In a simplified example, how much interest would a buyer owe if they still owed anything at month 12? What should a buyer do?

Check your understanding

Quiz

Who benefits most from a low interest rate credit card?

Card B has a $120 fee and 2% cash back. On $5 000 of yearly spending, what is its net value?

A phone plan is $0 down and $65/month for 24 months. Another is a $500 phone plus $40/month for 24 months. Which costs less overall?

What is a credit card's grace period?

Which should you check before signing a gym contract?

A streaming service is $12/month or $120/year. How much does the yearly plan save?

For parents and teachers

Big idea: Ontario's F1.6 asks Grade 8 students to compare interest rates, annual fees, and rewards and other incentives offered by credit card companies and consumer contracts to determine the best value and the best choice for different scenarios. All cards and plans in this lesson are made up. Interest calculations are simplified (real cards calculate interest daily).

How to help at home:

Talk (in general terms) about how your family chose a phone plan, internet plan or card, and what fine print you check.
Look at an offer that arrives by mail or email together and find the catch.
Model the habit of paying a credit card in full if you can, and explain why.

Common difficulties:

Choosing by the monthly price only. Always compare the total over the same time period.
Counting rewards without the fee. Net value = rewards − fee (− interest, if any).
Forgetting their own habits. The best choice depends on how the person actually spends and pays.