By Carla Hindman
There may be a lot of good reasons for post-secondary students to consider getting a credit card: it’s a good way to start building a solid credit history, it can be safer than carrying large amounts of cash and can be a lifesaver in an emergency.
But inexperienced credit card users who don’t fully understand how they work, or who don’t appreciate the need for restraint and responsible spending, can find that they’ve dug themselves into a deep financial hole if they are not careful.
This past August, I spent some time with some high school students at Bay Street Boot Camp (BSBC) to give them a crash course in credit card basics. BSBC is a five-day summer course hosted by the Junior Economic Club of Canada that brings students from across Canada to the heart of Toronto’s financial district to teach them about personal money management education with a special focus on entrepreneurship and business plan writing. BSCBC provided a great opportunity to see how these students were interested in learning about the different financial tools that are available to them – we spent a lot of time talking about the true cost of credit and how to read and interpret a credit card statement.
So, if you’re just starting to build your credit history, or have a child who is, here are a few tips for responsible credit card use:
Read the fine print. University students are often deluged with “enticing” credit card offers. Don’t apply for a credit card solely because it offers a free gift, and be wary of cards that offer low ‘teaser’ interest rates – those rates may rise dramatically after a few months. Instead, look for a card with low or no annual fee and make sure you understand what the monthly grace period is (the time before monthly interest starts to accrue).
Ask about late payment and over-the-limit fees. This information is spelled out in the application process, but make sure you fully understand what it means. Look for a card that offers a leniency period with no additional charges, in case your payment gets delayed.
Pay off the full balance owed each month, whenever possible. Using a credit card is like taking out a loan. If you don’t pay your credit card balance in full each month, you’ll pay interest on that loan. While it can be convenient to consolidate spending on a credit card, remember that having to pay more because of added interest isn’t ideal. Practical Money Skills features an interactive calculator to help you estimate the true cost of credit card purchases over time by entering different annual percentage-rate and monthly payment scenarios.
If you can’t afford a purchase today, chances are you won’t be able to afford it in a month when the bill arrives. Also, understand the full costs of using your credit card for cash advances, which carry much higher interest rates and start accumulating finance changes immediately. This can lead to a downward spiral of debt that may be difficult to overcome.
Explore other alternatives. If you want the convenience of carrying a payment card without the risks of incurring unmanageable debt, there are other options such as debit cards (where money is drawn directly from your chequing account), and prepaid cards, where the funds are added to the card first, and then used.
If you’re worried you are going to start missing payments, contact your credit card issuer. They may be willing to work out a repayment schedule that won’t damage your credit rating, since that could make it difficult to rent an apartment or buy a home or car later on. Also, many employers and insurance companies run credit checks on prospective employees, so you will want to consider how a poor credit rating could impact your employability in some cases.
Bottom Line: Students have enough to worry about with mid-terms and piles of laundry – getting an ‘F’ in credit cards shouldn’t be one of them.
Carla Hindman is Director of Financial Education at Visa Canada and directs the Practical Money Skills program for Visa Canada.