BUSINESS & CAREERS
From Issue #7
CREDIT CARD SMARTS
The Essentials of Paying with Plastic
By Nancy C
L i f e s a v e r ? Or bane of a student’s financial
existence? A credit card may be as easy to get as a part -
time job at a fast-food joint, but young people should
closely watch their plastic spending or risk working
eons of overtime getting out of debt, say experts.
“I believe teens need to be introduced to the whole
concept of credit early, and they need to understand
that when you use someone else’s money it costs you,”
said Gail Vaz-Oxlade, Toronto author of A Woman of
Independent Means.
However, Vaz-Oxlade is against the current practice
of credit-card issuers aggressively targeting students across North America, offering freebie giveaways with
credit-card applications.
“They’re hoping to hook these young people early and build
their loyalty and have them remain customers for the
long term. The fact is that these teens probably don’t yet have the
skills to use a credit card in an effective way and they
don’t have the resources to pay it back.”
That said, Vaz-Oxlade isn’t totally opposed to
young people holding credit cards, so long as the limit
is low and a parent co-signs.
“With a $500 limit just about anybody could learn
to manage their money,” Vaz-Oxlade said, pointing out
that a student working part-time could pay off their
credit limit in a matter of weeks.
But while a card is great for emergencies and making
purchases over the telephone or the Internet, it can
lead to financial disaster – especially when coupled
with student-loan debt.
And some students are perfectly aware of that.
“I don’t have a credit card and I don’t want one,”says Jacob Clark, 20, a student at Ryerson University
in Toronto. “I don’t want to put myself in a situation
where I’m going to spend money I don’t have. I’ve
known too many people in debt.”
Jeanine Ching, also 20 and a Ryerson student, says
a credit card would spell trouble for her. “I kind of
want one for emergency situations but I know it would
go beyond emergency situations, so it’s better that I
don’t get one,” Ching says. Ching uses her debit card
for now, because it’s accepted almost every where these
days, and will build up her credit later on, when she
needs to make significant purchases.
THE DIRT
ON CREDIT CARDS
Who can get one?
Without an adult co-signer, card holders must
be over 18.
What’s the cost?
Cards usually charge an annual fee that can vary
widely, so comparison shop. The same goes for
the interest rate charged: rates vary from 10%
on student cards issued by banks to 25% on
department store cards. If you don’t pay the
balance off in full, interest is charged from the
day you made the purchase, not the day you
received the bill.
How much must I pay?
At least 5% of your balance every month.
What if I don’t pay?
Your credit record follows you around for seven
years and a bad history can make your financial
life very difficult. |
Students are especially likely to mismanage their
credit because they’re new to dealing with their
finances, said Carl Ritchie, senior vice-president at
Mandelbaum Spergel Inc., a bankruptcy trustee firm.
“In many ways...they don’t know right from
wrong,” Ritchie said. If young people haven’t learned
budgeting skills at school or at home, “they’re a fish
out of water, so to speak.”
It starts quite innocently, said Joyce Brown, co-ordinator of counselling services at consulting and
accounting firm BDO Dunwoody in Hamilton.
Students start by using credit cards to pay for dinner
or tickets to a movie or a concert.
But when the bill comes, young people often
choose to pay only the minimum, carrying the balance
over to the next month. That’s where the trouble
begins, as credit cards usually come with a hefty interest
charge, anywhere from 10 to 25 per cent.
That means, a stereo bought for $499 on a credit
card with an interest rate of 10 per cent would end up
costing $511.48 if the bill isn’t paid for three months.
After a year, the stereo’s real cost would be $548.90.
“As soon as you carry a balance, a warning flag
should go up that there’s something wrong with your
budgeting scheme,” Brown said.
“Credit cards sneak up on you.”
Krystal Phirtieraj, 20, a second-year Ryerson student,
saw that happen to her brother, and is determined to
make sure she handles her credit card better. She said
she pays her bills in full, right away, even when she
makes big purchases, such as her university tuition.
One of the easiest ways to get into a financial crisis
is by having too many credit cards – department store
cards, gas station cards and regular bank-issued cards.
If you regularly take cash advances, can’t make even
your minimum monthly payments on your credit
cards or aren’t really sure how much you owe, you are
probably in over your head.
The Canadian Bankers Association recommends
that if you find yourself in one of these situations, put
away your cards immediately and contact the card
issuer to work out a payment plan.
CREDIT CARD STATEMENT TIPS
• If you pay the full New Balance, interest
will not be charged.
• If you pay only the Minimum Payment,
you will be charged the annual equivalent
of 17% interest for 27 days for the
computer purchase of $2,000, and 17% for
the 17 days for the book purchases of
$1,000. This adds up to $23.73 for January
and $39 for February for a total of $62.73
in interest charges on your February
statement. This means your February
statement is going to be bigger than your
January statement, even if you pay $50
and don’t make any other purchases!
• If you don’t pay the $3,000, in a year,
the interest would be roughly $510,
increasing the purchase price by 15%.
• If you use a department store card at
28%, the interest would be a whopping
$840 – almost a 30% increase from the
purchase price. |
An experienced counsellor at a not-for-profit credit
counselling agency can also give advice, help develop
a course of action and create a budget.
So how do students avoid these pitfalls when planning
finances for the next school year with a
credit card in mind?
“Shop around, ’’ Brown advised.
‘‘Check out to see who is offering the best
interest rate. Find out what the grace period is
between borrowing money and having to pay
the money back.’’
And when it doubt, go back to good old-fashioned
cash.
ONLINE
Want to learn more?
Check out these
Internet sites:
There’s Something
About Money, a Web
site maintained by
the Canadian
Bankers Association.
www.yourmoney.cba.ca
Money Savvy 101,
maintained by
Industry Canada,
offers advice on
using credit cards
and debit cards
CLICK HERE |
