The pros & cons of plastic

Before coming to university, Vivian Lee, ArtSci ’06, got a credit card from TD Canada Trust on her parents’ recommendation. Lee said she chose a TD card because she already had an account with the bank.

However, Lee said she didn’t know much about essential elements like credit ratings, payment options and debt before signing up.

“[The bank] explained some things to me when I got the card, but I didn’t know much at all,” she said. Lee is not alone in her inexperience. A recent survey conducted by BMO Bank of Montreal revealed that 77 per cent of post-secondary students have a credit card, but 72 per cent of the 1,008 college and university students surveyed didn’t know how long credit ratings stay with them.

Credit ratings can stay with someone for 10 years or more, according to Canada’s Finance Department.

That 72 per cent also didn’t understand the long-term impact of a poor credit history.

“Having too many derogatory marks [indicators that you have been remiss in bill payments] on your credit bureau will make it difficult for you to borrow money for buying a vehicle, or taking out a mortgage or a loan,” said Irene Hughes, the coordinator of the K3C Kingston Credit Counseling service.

“And a bad credit rating will affect your employment down the road, because many employers will now check credit histories. A lot of the time students aren’t aware of that.”

Hughes said she and her co-workers at the not-for-profit service offer free financial advice to anyone who is willing to make an appointment and visit their offices at 417 Bagot St.

The service, which is funded by government grants, donations from the United Way and private contributions, can also offer free seminars on financial management to interested on-campus groups.

Lee said she would have liked to know more about credit limits before signing up for her card.

“[I wish someone had told me] not to increase my limits,” she said. “[The bank] does it on their own sometimes, and sometimes they ask me and I just say ‘OK!’ ”

Lee’s advice for new credit card holders is to be aware of their spending habits.

“Don’t spend what you don’t have,” she said. “Even though there are minimum monthly payments, you’ll have to pay it all back eventually, and it accumulates.”

Hughes said students usually come to the Kingston Credit Counseling service after graduation, when they are struggling to pay off debts incurred during their education.

“The shock will come on the day they leave school and the debts come down all around them,” Hughes said. “Credit card debt makes your life that much more difficult.”

While Hughes said judicious credit card use can work for university students, both she and Linda Kemp, a Queen’s student awards officer, advised against incurring major debts on plastic.

The University’s award officers give free counseling to students on matters concerning financing their educations, including bursaries, scholarships and government aid.

“[Credit cards are] a form of debt with a very high interest rate,” Kemp said. “Students would be much further ahead to take out a student line of credit, because you only pay interest on what you use.”

Kemp said students can approach their banking institution, usually with a co-signer, to apply for a line of credit. Once the line is issued, the holder will only need to pay interest on the money they withdraw from it, rather than on the full amount.

Kemp said lines of credit generally have lower interest rates than credit cards, with the former usually running one to two per cent above the prime rate—which is around four per cent, Kemp said—and the latter often hovering around 20 per cent.

However, Hughes cautioned against avoiding credit cards altogether—do your research, she said, and plastic solutions to issues of cash flow can sometimes be found.

“People think credit lines are always the cheapest, but that’s not always so,” Hughes said. “You have to know what the interest rate is. There are low-interest credit cards at any bank, but you have to ask for them. Banks are generally pretty good about dealing with students.”

Hughes said the TD Canada Trust Emerald card is a low-interest option, and that Scotiabank offers one as well. She stressed the importance of looking around to find the best package to suit one’s needs.

“All those things that have [special offers] like Air Miles, those things aren’t free,” she said. “You have to shop around for a good credit card, one that works for you.”

Mike Kitchen, Vice President of the BMO Mosaik MasterCard, agreed.

“Pay for what you use,” he told the Journal in an e-mail. “Credit card features and benefits are not free—they’re incorporated into the annual card fee. [Students need to] find a card that lets you choose the interest rate, features and rewards you want, so that you’re not paying for options you don’t use.”

Using such prudent judgment, Kitchen said, credit cards can have their benefits.

“Used responsibly, a credit card is one of the most convenient and practical payment instruments that an individual can use and it can help establish a solid credit history early in life, something that will be invaluable when you buy your first car or rent your first apartment,” Kitchen said.

However, he also said he wouldn’t recommend using credit cards to incur significant debts.

“Credit cards are not meant for long-term debt management,” he said. “The biggest mistake people make with their credit cards is overusing them—which can be especially easy if you have more than one card. You can avoid a credit crunch by following certain guidelines you set for yourself.”

Kitchen said he recommended carrying only one carefully chosen card. He said credit card companies are obliged to tell you certain things about the product in the advertising or application process, including the annual interest rate, the grace period, additional charges or fees, optional services such as insurance and a telephone number for service.

The annual interest rate is the interest to be paid on any outstanding balances carried on a card, and the grace period is the time between a given statement date and the payment due date.

“Many credit cards ‘bundle’ their card features, so if you’re not careful, you could end up paying for features you don’t need or won’t use,” Kitchen said.

The Mosaik MasterCard comes in both low-interest and regular-interest varieties, but Hughes said the latter option isn’t a particularly good deal for students “since it’s a regular-interest card.”

The website of the Financial Consumer Agency of Canada—which contains detailed lists of tips for choosing credit cards, along with other financial advice—lists the low-interest version of the Mosaik MasterCard as one of only two low-rate cards for students. The Desjardins low-interest VISA plan for students is the other.

To avoid falling into debt in the upcoming holiday present-buying season, Hughes recommended making a careful budget and keeping track of how often you reach for the plastic.

“The first thing everybody should do is to make a list of who you’re going to buy for, and take out any aunts, uncles, cousins,” she said. “Take a serious look at who you’re actually going to buy for. People won’t be upset—they know you’re a student.”

Then, she said, it’s important to set budgeted amounts to spend on each individual, and to stick to them.

“If you’re putting presents on a credit card, remember that’s a loan. Be sure that in January you’ll be in a position to repay them,” Hughes said. “If you get yourself into financial difficulties [during the holidays], it will take until May or June to get out of them.”

She also advised student shoppers to keep track of receipts and spending totals, billing dates—in order to spread purchases out over billing periods whenever possible—and purchases on debit cards as well as credit cards.

“We’re just so used to plastic, we don’t realize how much that little debit card can do,” Hughes said.

How to choose a credit card

Annual fee
Compare the annual fee to the interest rate charged on the card. If you plan to carry a balance on your credit card, choose a card with a lower interest rate, even if it has an annual fee. For example, a card with an annual interest rate of 12.9 per cent and an annual fee of $15 is better to have than a card with an annual interest rate of 18.5 per cent and a $0 annual fee. If you plan to pay your bill every month, however, choose a card with a higher interest rate to avoid the annual fee.

Annual interest rate
In many cases, there are different interest rates for different transactions. Look for the lowest interest rate for the type of transaction you will do the most—purchases, cash advances or transferring one credit card balance to another. Watch out for credit card companies that offer a low-rate introductory offer on a higher-interest card.

Grace period
The more time you have to pay your bill without accumulating interest, the better. If you have an interest-free period for new purchases, a longer grace period will give you more time to pay. If your credit plan doesn’t have an interest-free period, pay your credit card bill as soon as possible to pay less interest. Waiting until the due date will only increase your interest charges.

Rewards program
If you normally pay off your credit card balance every month, you can sometimes benefit from reward programs by accumulating points. But you usually have to make a large amount of purchases before getting enough points.

Service fees
These fees usually add significant costs to your credit card transactions. Cash advance fees and foreign currency exchanges are usually the culprits for this. If you make these transactions often, find a card with a low fee for this service.

—Source: Financial Consumer Agency of Canada

When commenting, be considerate and respectful of writers and fellow commenters. Try to stay on topic. Spam and comments that are hateful or discriminatory will be deleted. Our full commenting policy can be read here.