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Basic Finances for Youth, Part 3: How to Choose a Credit Card

Many of our older youth have told us that they have tremendous challenges with handling money and understanding basic finances. This new blog series aims to assist youth with these challenges, offering easily understood information on a range of financial topics from credit cards to banking to loans.  To build good credit history you just need to get a credit card, right? Not exactly. Or more accurately, yes BUT… The “but” is that there are a gazillion credit card options out there: hundreds of cards with different interest rates, fees, benefits, and rewards. In order to build up your credit history you have to choose the card that is right for you and use it responsibly. Just picking any credit card and starting to use it isn’t necessarily going to help you build your credit history. To learn how you can choose the best credit card for you read on! To get started, think about the following pointers:

  1. Getting a credit card isn’t the same as getting more money! It is not a blank check! Always remember that you will not have more money after you get your credit card than you had before you got it.
  2. Credit cards don’t actually come with interest payments. If you pay the amount you owe in full and on time, you will not have to pay any interest.
  3. Credit cards may cost you! If you use a credit card to get cash, for a wire transfer, or a money transfer you will have to pay interest. So, your best bet is to use your debit card instead if you can.

Think about choosing a credit card this way: you wouldn’t buy a car without considering its features, would you? When getting a car, you would need to think about whether you want standard or automatic car. You might check out how the car is on gas and you would consider whether you wanted to get a base model or something a bit fancier. You’d probably shop around at different dealerships until you found the car with all the features you needed. Of course, price will be a big factor. The same process applies to choosing a credit card. To pick out the right credit card for you, you need to look at the features of different cards. In this case, the features you need to check out are interest rates, additional fees, and benefits or rewards. Below is a brief summary of what you need to look for and how you can compare credit cards’ features. Interest Rates Different credit cards have different interest rates, what interest rate the card comes with is very important.  The Government of Canada has an online tool that can help you compare different interest rates for the credit card that fits your age and stage (e.g. if you want a student card or a standard card, etc.). This tool is called the “Credit Card Selector Tool.” To use this tool click this link: http://www.fcac-acfc.gc.ca/eng/resources/toolCalculator/creditCard/selectorTool/index-eng.asp Extra Costs The law says that any extra fees have to be included in the credit card application. This means you absolutely have to read the application carefully, or have a trusted person read it carefully, before you apply. Examples of possible fees include charges for exceeding your limit, increases in interest rates if you miss a payment, and annual card fees. You can also use the “credit card selector” tool to compare the fees of different cards.  Click the link above. Note: you should compare costs to make sure you are getting a better value if you choose a card with annual fees instead of a no-fee card. Benefits Some cards may offer rewards and/or benefits. Remember, if you have to pay more to earn your benefit than you will receive when you get the benefit, it is not actually a benefit. When you are looking at a benefit or reward think about the timeline. Ask yourself how long it will take to earn the reward. You should also think about whether or not you are likely to use the benefit and whether or not you can access the benefit some other way. For example, if a card offers rental car insurance as a benefit, think about whether you would actually ever use that or whether your existing auto insurance provides you that coverage already. Grace period The grace period is the period of time you get after you made your purchase before interest charges start to build. Some cards have no grace period at all, while others have grace periods of up to 25 days. To figure out what grace period the credit card offers, inquire with the credit card provider. Card Type If you are a student, chances are you may want a student credit card. This is a card for individuals with limited incomes; it comes with lower limits and opportunity for lower interest rates. Student cards limits are usually between $500 and $1,000. The Government of Canada has a chart that compares low-interest student credit cards. To see this chart click here: http://www.fcac-acfc.gc.ca/eng/resources/publications/paymentoptions/CreditCardsYou/PDFs/Student-Low-Rate-eng.pdf The “When” Factor Keep in mind that you can’t just fill out the application today and get a card tomorrow. There is something we call the “when” factor. This refers to the fact that you can only get a credit card when you reach age of majority in whichever province you live in (18 or 19). To figure out the age of majority in your province click this link: https://secure.tdcanadatrust.com/apply/aom2.html If you are younger than 18 or 19 your parent or guardian can co-sign for you in order to assist you in getting a credit card. The other part of the when factor is that you should get a credit card when and only when you are ready to use it responsibly. Many adults and youth alike have trouble using credit cards appropriately. It is okay if a credit card is not right for you at this time. Be honest with yourself about what you can manage. Stayed tuned for the next installment of this blog series. It will give you some tips about how to use your credit card. For more info on this blog’s topic go to: http://www.fcac-acfc.gc.ca/eng/consumers/creditcard/index-eng.asp

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