5 credit card no-nos for students

Credit card companies are racing to target applicants on college and university campuses, and students are eagerly signing up for plastic, some for the first time in their lives. But while credit cards can serve as convenient payment tools or emergency padding, they can turn into high-interest debt traps for students who use them incorrectly.

The 2012 Survey of Undergraduate Students from the Canadian University Survey Consortium (CUSC) shows that six in 10 students reported at least some education-related debt. And according to Michael Krieger, an Ontario bankruptcy trustee and assistant vice president of BDO Canada, the average credit card APR is 19 to 24 per cent. no-no-student

That debt piles on top of student loan debt, which, in 2012, hit $28.3 billion, according to Statistics Canada (one in eight families at that time averaged $10,000 in student loan debt).

So the last thing you want is to add to that number, especially since you don't get to put off paying credit cards until after graduation like you do with student loans. The more you can save now, the more you can put toward your loan payments later. Follow a few general rules, and you can keep that shiny new card without regretting it later.

1. Don't treat your credit card as an extension of your budget.
Brian Betz, administrative lead for Alberta-based Money Mentors, says the key to prudent student financing is forming and sticking to a thorough spending plan.

"We encourage students at the beginning of the year to look at what resources they have available to spend, then set up a monthly budget that basically allows them to make it through to the end of the school term," says Betz.

For example, if you have $12,000 to last for six months of schooling, you are restricted to $2,000 monthly. You should then put together a detailed spending plan that covers all expense categories such as rent, utilities, transportation and entertainment.

"Students should not use a credit card as an extension of their budgets," says Krieger. Just because you have a card with a $3,000 limit in addition to your $12,000 does not mean you really have $15,000.

Rhonda Sherwood, a ScotiaMcLeod wealth adviser who also belongs to Vancouver Board of Trade's mentor program for students, is particularly concerned about students going on spending sprees after getting their first credit card. She strongly suggests parents detail a credit card's true purpose and set examples of responsible spending habits before their children get their first credit card. Explain that keeping up with the latest fashion trends and having the most high-tech gadgets are not necessities, and are, therefore, not responsible credit card purchases.

She also suggests that newbies who lack self-discipline start out with a prepaid card until they are mature enough to handle a regular credit card.

2. Don't get a credit card unless you understand how it works.
Often youths get into trouble because they don't fully grasp card interest rates or repayment obligations.

Patricia White, executive director of Credit Counselling Canada, says you should never use credit cards for any expense you can't pay by the time your monthly statement arrives. Credit card spending is particularly risky because it assumes future income you have not yet earned.

White explains that making minimum payments boosts an item's cost by the compounded interest amount and extends your indebtedness period, which negatively impacts other expenses.

3. Beware of the cash advance trap.
One of the costliest mistakes students make is taking out credit card advances. Not only are cash advance APRs and fees higher than they are on regular purchases, but interest becomes payable from the day you take out the advance. A debit card is preferable when at the ATM.

If the problem is that your chequing account is dry, you should revisit your budget and make cuts where necessary, then consider a part-time job, a line of credit with a low interest rate or even asking family for help.

4. Don't get a card without understanding credit scores.
Some marketers argue that a credit card is an indispensable tool for students to start building their credit history. But not everyone is buying that logic.

"[Credit card companies are] really thinking about profiting from a long-term customer," says Betz, who notes that banks often look for a co-signer, usually a parent, before approving a student credit application.

Too much credit card debt can affect your credit score by increasing your credit utilization ratio -- the amount of debt you have compared to your total available credit. Graduates will be in a much better position to build a strong credit score going forward if they don't have to contend with high-interest credit card debt in addition to repaying any student loans.

5. Don't assume plastic is your only emergency option.
White, Betz and Sherwood agree that credit cards can help in sudden emergencies, such as a family crisis requiring a sudden trip home or unexpected car repairs.

Even then, Krieger says that people shouldn't overlook the fact that many student loans offer relief and assistance programs that assist students facing unexpected changes to their circumstances.

Another strategy is to set aside some "rainy day" money to cover financial crunches. Betz recommends tucking away three months' worth of emergency expenses in a separate account. Avoid becoming vulnerable to financial troubles, Betz says, and you will be able to avoid stress that could distract you from your education.

See related: Young Canadians not managing credit cards wisely; Why we pay credit card fees -- and how to avoid them

Updated August 12, 2015

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