*Free* blankets, cookies, or trinkets being handed out in return for signing up for a credit card is as much a part of the new school year as textbooks and tuition payments. The traditional pitch goes something along the lines of:
“Hi, my name is <you forget the name because the person talking to you is very attractive>, and I was wondering if you’d be interested in getting a free high-quality sweatshirt today just for signing up for our platinum/silver/diamond/360 credit card? Our cards are super safe and designed for students. If nothing else, just keep it in your pocket, use it to make the odd online purchase, or in a real emergency. You’ll notice that our card is exclusive to this university and comes with this really cool design on it. It even lets you go to the movies for free just for using it to buy stuff you’d be buying anyway! If you don’t have a credit card yet, you should know that you really need to get one in order to build a credit rating. If you don’t have a good credit rating by the end of this year, your life will probably get really, really hard.”
This sales pitch has been carefully refined over several decades of selling to students. Clever marketing folks understand what students need to hear to want a credit card, and to give themselves permission to get a credit card. What it doesn’t focus on is how to use credit cards effectively and responsibly.
1) Never sign up for any financial product in order to get an attractive person to talk to you or for a “free” ten dollar product.
2) What does “designed for students” or “student credit card” even mean? How are they different from any other credit card? If you do a quick Google search on this stuff before approaching any credit card kiosk, you’ll probably find the terms “interest rate” and “rewards” listed fairly often. Cards designed for students should have more than just edgy names and colour coordination. They should have a relatively low interest rate. Given that most students don’t spend enough money to rack up rewards, you can safely ignore most of these promises of credit card reward grandeur.
3) Making online purchases and then immediately paying off your balance is a great way to use a credit card.
4) Going to your financial institution and asking to open a student line of credit is probably a much better option for money-related emergencies than a credit card, due to the fact that they almost always have a much lower interest rate. When you borrow money at a lower interest rate it means that you will pay less on the overall loan.
5) Credit cards will help you build a credit rating, and yes that can definitely help with purchasing a vehicle and a house in the future; however, credit cards aren’t the only way to boost your credit rating and life doesn’t end if you celebrate your 19th birthday and don’t have a credit card yet. You can build up a good credit rating simply by paying your cell phone bill on time, repaying your student loans without missing any payments, or using a line of credit responsibly.
6) Credit cards shouldn’t be looked at as works of art and any “perks programs” should be far down your list of reasons you sign up for a specific card.
7) What happens if I don’t pay my bill at the end of the month? Did I miss that part? Do I even have to pay it back right away?
The bottom line is that while understanding how to use a credit card properly can really help you, improper use can quickly cripple your financial world. The reason credit cards can be so dangerous is the magic known as interest rates. When interest rates are working for you (think saving and investing) then they can be a great friend.
When you get on the wrong side of interest though, bad things start to happen really quickly. The basic idea is, if you don’t pay your credit card balance at the end of each month you will be paying interest on the amount that you borrowed when you used your card. While an annual interest of 20% doesn’t sound like much at first, that can be hundreds or even thousands of dollars over a four-year degree program if you don’t make it a priority to pay off all of those “emergencies” (it was a 70% off sale!) sooner rather than later.
A 2013 survey of over 22,000 undergraduate students found that almost one-third of students had two or more credit cards. This can be dangerous if you are the type of person that loses track of bills and payments.
The survey also revealed that while 80% of students regularly paid of their balance, like you’re supposed do, the remaining 20% carried an average unpaid balance of just under $3,000. If you were to carry that average balance for a year at a 20% interest rate, you’d be looking at $600 go up in smoke.
Here’s a rule of thumb cheatsheet when it comes to shopping for your first credit card.
1) No annual fee. There are plenty of options you don’t need to pay for.
2) A relatively low interest rate (think under twenty percent – maybe even under 12% if you think you might have to carry a balance at some point).
3) A card that is available from the institution that you bank with will be the most convenient to pay every month. You can often set these cards up to get paid from your chequing account automatically – thus ensuring you never get smacked with a surprise left hook from those pesky interest rates.
4) A rewards program that offers a few nice little perks (even though this is relatively low on the priority list).
If you are confident in your ability to use a credit card as a general tool that can make your life easier, and not just as a way to facilitate purchasing luxury items, then go ahead and make the leap. Before jumping in with both feet however, it’s a good idea to seriously think about your current attitude towards temptation and money management. If you already have problems staying within a budget, or paying bills on time, then maybe it’s best to get some better habits in place before committing to a credit card.