It’s very common for first year university students to be baited with a credit card by a credit card company within the first week of classes. The security of having an emergency fund to tap into sounds like a logical reason for taking on a credit card. While some will manage the monthly obligation, many students will eventually become overwhelmed and balances will become a financial burden.
For many young Canadians, university is the first time away from home and making decisions on their own. Distraction and excitement can lead to spontaneous purchases. The spending honeymoon comes to a halt with the arrival of the first statement in October. Either the amount owed is paid off in full or the journey of making only minimum payments begins. Usually it’s the latter scenario for most students who have limited bank accounts.
Credit cards have become pervasive in Canada with more than 76 million cards in circulation last year which is more than double the number in 1999, according to the Canadian Bankers Association.
A 2013 study of more than 22,500 undergraduate university students found that 85 per cent had at least one credit card, including 29 per cent with two or more.
The data compiled by 28 universities found that 80 per cent regularly paid off their balance monthly but those that didn’t had an average unpaid balance of $2,959. Ten years earlier, 81 per cent of students said they had at least one credit card with the average unpaid balance totalling $1,279.
Much of the unpaid balance accumulates from gadget purchases and entertainment. Students may be stressed as they struggle to make payments on their credit card balances as well as their rent. Now some may think students need experience with credit before getting a job. Building one’s credit history is important, however, before obtaining credit it would be beneficial for parents to educate their children about proper money management. This would include proper budgeting and responsible spending. Early preparation may prevent financial stress for students and eventual hounding by collection agencies.
For more about financial literacy for students, read, “Why we should add Personal Finance as a Subject in our Ontario Schools”.
Credit card companies encourage students, who are active consumers, to take credit, thereby obtaining loyal customers for life. Students need to consider the benefits and hazards of taking credit before entering any contract. Often creditors entice students with free T-shirts or chance to win a trip in order to seal the deal. Instead of comparing interest rates and fees, many students are convinced by flash and short term gains.
If students are able to take on credit, they should seek no-fee options that provide cash back for groceries or free entertainment that can be useful on a tight budget. A limited credit balance is a must with no options for increased credit until it is affordable.
Here are some tips to managing credit cards:
• Pay off the monthly balance in full each month. This will avoid having to pay the minimum payment that includes interest.
• Sign up for automatic payment from your bank account. Keeping track of payments is a must going this route to ensure funds are available.
• Avoid cash advances. Interest charges will apply and you want to avoid adding interest to the principal loan.
• Always check your monthly statement to ensure it is accurate.
• Check your credit report each year. This report will reflect your financial history and stability. It is like a report card showing how you are doing financially. Banks will check a credit report before loaning funds. It is a good idea to be responsible with personal finances from the start so when the time eventually comes to request a car loan or mortgage, you are in good shape from the banks perspective.
For more on student debt, read, “Trying to Curb Student Debt”..
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