'Not free money': What students should know before getting their first credit card

Everyone starts building their credit score somewhere — and for many, it’s getting that first credit card during college or university.

Financial institutions know whatever card you get is likely to be kept for a long time.

These products are “sticky,” said Robin Taub, a chartered professional accountant in Toronto, and author of "The Wisest Investment: Teaching Your Kids to Be Responsible, Independent and Money-Smart for Life."

“Once you have a relationship and a card or accounts with one bank, you don’t often change,” she said. “That’s why you’re seeing so many of these (credit card) promotions and kiosks on campus.”

Facing a likely long-term commitment with whichever card they choose, students should be picky in the face of “giveaways and freebies,” she added.

The top three considerations when choosing a card are annual fees, interest rates and rewards, said Taub. The first two should be as low as possible, while the third should be as high as possible, based on your lifestyle.

Most credit cards carry interest rates of around 20 per cent, with cash advances higher, although there may be promotional rates offered at signup. In this stage of their financial life, however, Taub said students shouldn’t tangle with interest at all.

“Just understand the minimum payment — when you go into your (statement), they make that minimum payment a little more visually obvious than the full amount, right?” she said. “Don’t just pay that minimum balance, because then you’re carrying a balance at that rate of interest.

“Try and pay the full amount, and pay it on time to avoid penalties and interest,” Taub added, “and to build a credit rating.”

Paying your full balance each month shows you’re using credit correctly — you’re budgeting — your spending doesn’t exceed your earnings. Young consumers are still getting into trouble during this life phase, said Thuy Lam, a certified financial planner at Objective Financial Partners.

“I see so many students — even when I was a student, my own friends — get into $20,000, $30,000, and $40,000 of credit card debt during school years because they don’t realize that, ‘Oh, it’s not free money,’” she said.

Get a low limit and resist any offers to increase it until you’ve established good spending habits, Lam added. For students with minimal cash flow — not working part-time during school, little savings — this credit card barely needs to be used at all.

You can drop one recurring bill on your card, like a phone plan. A small amount is easy to pay completely and having it show up every month establishes a good history of timely payments.

“I think the key is keeping in mind: what is the purpose of a credit card?” Lam said. “And for students, that’s No. 1: facilitating small bill payments and, No. 2: building and establishing credit.

“The purpose of a credit card is not so we can spend freely, it’s because we live in a credit system,” she added. “It's just important to establish credit and keep it healthy.”

As for rewards, Taub pointed out that some students may have support from their parents, savings, RESPs, or scholarships — and with those resources, they might find value in travel, concerts or other lifestyle perks.

But she also noted most students are struggling financially; a recent TD survey found 65 per cent of students said they were financially unstable. There may be more value in a simple cash-back card.

Lam agreed — sometimes rewards are a flashy lure to students who may not yet be in the position to make those rewards worthwhile.

"I tend to recommend a no-fee card, and just a very simple, percentage cash back,” Lam said. “Whether it’s for groceries or overall spending — just keep it simple that way, and to stick with one credit card in the beginning.”

Once you have a strong credit score, and perhaps a better financial situation, you might receive offers for other cards with better benefits, Lam said. There may be a signup promotion for thousands of reward points — but it’s smart to keep your first card going, even if you add something new.

“History and track record is so important,” Lam said. “When it comes to building a really good credit score, you want one card and you want to keep it for a long time. Let's say you were to get a second card at some point — don’t necessarily cancel the first one because that has the longest history.”

Go slow, keep limits low, and build good habits around budgeting and spending, Lam said. She recommends everyone put aside a few minutes each month to review transactions on their credit cards.

“There could be fraud happening — that’s happened a few times (to people I know) — or someone charged you the wrong amount, or you didn’t get a refund,” Lam said.

And scanning your statement is a moment to look back on the month: “It’s a reflection point to ask yourself, ‘Okay, is this what I intended on spending?’”

This report by The Canadian Press was first published Oct. 1, 2024.

Nina Dragicevic, The Canadian Press