Hey you! Want a free blanket?
That’s the line that credit card companies in Montreal use in order to get students to sign up for their first credit card (yes, those wonderful, magical pieces of plastic). T-shirts? Who needs t-shirts—this is Canada: we need blankets.
Each semester MBNA sets up shop near the McGill bookstore and tries to get students to sign up for a Mastercard. Why would they give away a free blanket though? How do credit cards companies make money anyways?
Essentially, every time you, the credit card user, don’t pay your full balance, the credit card company tacks on an extra 1.67% (on average). This means that if you charge $100 to your credit card and pay off $99 of it, your bill the following month will be $2.67, even though you only had $1 left to pay.
Another bad scenario is if you only pay the minimum balance. A lot of credit card companies put this number in bold, next to your balance. The idea is that the user will think that the smaller amount is the only amount due and happily make a payment. The problem with only paying the small, minimum payment is that the amount of interest is still calculated on that larger, scarier number.
Nowadays, Canadian credit card companies are obliged to write the length of time that it would take someone to pay off his/her credit card. Before this law was passed, you could pay and pay and pay and never really understand what you were getting yourself into. Sure, there were calculators online to figure it all out for you but, why bother? The nice Visa company calculated a payment amount for you already—why not just use that?
Here’s an example. If I owe $500 on my credit card and paid only that nice small amount, known as the minimum payment, each month (calculated as accrued interest at 20% plus 10$), it would take me 51 months—or 4 years and 3 months—to pay off my credit card. I would also have to pay $229.33 in interest.
I am not saying that credit cards are always a bad idea. Credit cards are essential to building good credit (which you will need when you want to buy a house) and are useful when on vacation or to order things online.
The problem with credit cards, however, comes when people do not exercise responsibility and good judgement. Sure you have a $500 limit, but that does not mean that you can spend $500 if you are unable to afford paying it back! A good collegiette™ knows when she can afford to buy something and when she cannot—credit cards can be self-destructive if used irresponsibly.