3 minutes - Video
A credit card is not free money! However, managed well, it can help you build credit and achieve future goals.
For young people transitioning to adulthood, a credit card can be an important step in your financial journey. But with credit cards, and all types of credit, you need to be careful and understand what a credit can do for you, both positive and negative.
An agreement to borrow money
Holly Cooper is from the the Kahkewistahaw and Ochapowace First Nations in Saskatchewan and works for ATB Financial.
“Some people might not understand what a credit card means”, says Holly, “As a young person, you need to know it is not free money. Really, that credit card is an agreement that says you're going to borrow money from the bank and you're promising to pay it back.”
Be interested in interest rates!
When you apply for a credit card, make sure you know what fees or interest rate the bank is going to charge you. If you pay off your credit card balance on time, each month, then you will not be charged interest. But if you don’t pay it all off, then the bank may charge your card anywhere from 10-30% interest on what you owe.
Build a good rep
Getting and using your credit card wisely helps you build a "financial reputation" with lenders. It’s like borrowing money from a friend. If you pay them back, they are more likely to lend to you again and may even let you borrow more the next time.
“If a friend lends you one hundred dollars, part of why that friend might lend you one hundred dollars next month, is if you pay that first hundred dollars back. But it also works the other way. So if you if you borrow a lot of money and are taking a really long time to pay it back, then the bank might not be inclined to give you any more money. And your credit score is going to reflect that.”
Slow is the way
Holly says to go slow with credit cards. Don’t splurge or overspend. In the beginning, only use it for small stuff. Then pay it back each month.
Even if you only do $20-$30 worth of purchases a month, pay it off regularly. Holly says that builds good habits and the bank will be more willing to lend you money in the future.
A car? A house? Sweet!
Over a matter of time as you build your ‘financial’ rep, the bank may willing to lend you larger amounts of money when you go to ask for a loan or a higher limit on your credit card.
Holly says: “That will hopefully help enable you to get bigger things down the road, like a house or bigger purchases. The bank sees we lent you five hundred bucks say ten years ago and so we don't mind giving you a car loan because you've shown to be able to pay that back.”
But Holly says that if you don’t pay back your debts, then you might not be able to get loans in the future.
“That's kind of a signal to say, ‘Hey, I lent you money and you showed me that you wouldn't pay it back. And so I'm not going to lend you any more money.’ ”
Seriously, the key with credit cards is to take it slow, because it's not free money!