Understanding Credit and Credit Cards as a Student

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*This is a sponsored post written by me on behalf of RBC. All opinions are my own.

The financial literacy gap is widening between high school and post-secondary students – but not in the direction you might think. According to a new poll from RBC, 82% of high school students knew that paying the minimum balance on a credit card would require them to still pay interest, vs only 45% of post-secondary peers.

At first glance, I was surprised by this data. You would think that the numbers would be similar since many high school students naturally move onto post-secondary education, and they would carry that knowledge with them. That said, there are many students who don’t get their first credit card until they go to college or university (including me), so they may not be as informed.

When used responsibly, credit cards can be a vital part of your financial life. However, if abused, it could take years to recover. Here’s how credit and credit cards work as a student.

How credit cards work

At its most basic level, credit cards allow you to spend borrowed money. However, unlike debit cards where you can only spend what you have in your account, credit cards allow you to spend money from your credit card provider.

Every month, you’ll get a statement that outlines what you owe and when you need to pay your bill. What often confuses people is the minimum payment that’s listed on your statement. As the name implies, that’s the minimum amount you must repay to keep your account in good standing. However, if you make a payment of anything less than the entire balance listed, you’ll pay interest charges. The interest rate on credit cards is typically 19.99%+, so you should make every attempt to pay off the entire balance every month.

Credit cards have a set limit that you’re assigned, so you can’t exceed that amount without paying down your balance first. Additionally, you could use your credit card to withdraw money from an ATM. However, that’s considered a cash advance and comes with significant interest charges.

The benefits of having a credit card

Now that you know how credit cards work, it’s important to look at their benefits. Credit cards are an incredible tool when used responsibly. If you consistently pay your bills, you can enjoy the following benefits.

  • You can build your credit score – As you use your credit card, you’ll start to build a credit history and score. This is important if you ever need a loan in the future.
  • You can earn rewards – There are cashback and travel credit cards that give you rewards on every purchase.
  • There can be additional benefits – Many credit cards come with extra perks such as travel insurance, mobile device insurance, purchase protection, extended warranty, and more.
  • They can help you manage your cash flow – Credit cards give you an interest-free period on your purchases. You only need to worry about your payment when your bill is due.
  • Make purchases worldwide – Credit cards are widely accepted in person and online at most retailers around the world.

How to manage your credit card responsibly

Admittedly, when you get your first credit card, it can be tempting to spend. While there’s nothing wrong with charging your purchases, you want to make sure you’re being responsible with your credit card.

First off, if you’re concerned about costs, look for a no-fee credit card. There are many credit cards available that have no annual fee and offer some benefits. If you’re paying your entire bill on time every month, you won’t be paying anything.

When you get your first credit card, the limit offered may shock you. You could easily be approved for $5,000+. That doesn’t mean you need to spend all of it; you just have access to that amount. If you’re worried that you may spend to your limit and run into debt issues, you can quickly call your provider and ask for a lower limit.

Another way to easily manage your finances is to use any available tools. For example, the student edition of the RBC mobile app has a built-in feature called NOMI Insights. It analyzes your spending and gives you insights so you can make better financial decisions. For example, it might tell you that you’ve spent more on utilities, food delivery, and ridesharing apps this month compared to previous ones. That might encourage you to cook at home, take public transit or turn off your lights.

In addition, NOMI Insights can break down your spending into different categories, show you the difference between your money coming in and going out, and even tell you when a monthly subscription has increased in price. The idea here is to make managing your money as simple as possible.

Why your credit history matters

Having a credit history in Canada is essential since it’s a key piece of information lenders look at. More specifically, they may want to know what your credit score is. Your credit score is a number between 300 – 900. The higher your score, the more creditworthy you are.

Getting a credit card, making purchases, and paying your bills in full and on time will slowly increase your credit score. People who have a high credit score are more likely to be approved for a loan.

Building your credit score takes time. That’s why it’s a good idea to get a credit card when you’re a student. By the time you’re ready for a mortgage or auto loan, you would likely have an established credit history.

Understanding how credit cards and your credit score work is just one step to becoming a money-savvy student. If you want to learn more about your finances, attend a webinar or subscribe to a blog on personal finance or reach out to Financial Advisors who specialize in helping students and are available year-round, either in-person or virtually.

The important thing is that you don’t wait until your finances are out of control before seeking help. You can visit rbc.com/students to learn more.

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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