For a young credit card holder, that first swipe of plastic can feel liberating. However, using a credit card wisely is a skill that needs to be learned.
A recent survey of young Canadians between the ages of 18 and 34 highlights this learning curve. The TD Canada Trust Credit Cards and You poll found that while many young people are actively using credit cards, they’re not always doing so wisely. More than half of respondents aren’t paying off their credit card balances in full each month. Around 40 percent are only making the minimum monthly payment, and 23 percent have missed a payment altogether.
Generation Y consumers, those born since 1983, have also increased their spending on luxury goods, travel, and fine dining since 2009.
Carmen Wong Ulrich, author of “Generation Debt: Take Control of Your Money,” believes the root of the problem is education. “Unfortunately, financial education is not a requirement, but somehow calculus is?” she says.
Ulrich recommends young people educate themselves by reading financial news and subscribing to personal finance blogs. “Know the ins and outs of everything you sign and be very realistic about your ability to pay back what you borrow. When it comes to your money, make small sacrifices now so you don’t have to be denied savings later.”
Tips for Using Credit Cards Wisely
Pay the Minimum
Missing your credit card’s minimum payment by even 30 days can result in an interest rate hike and the loss of any promotional rates. Paying more than the minimum each month helps you pay off your balance sooner and saves you money on interest. If you can’t make the minimum payment, contact your card issuer immediately to explain your situation and see if they can work with you.
Pay More if You Can
It’s wise to pay off any outstanding credit card debt as quickly as possible. For instance, carrying a $2,000 balance at a 19.99 percent interest rate and only making the minimum payment each month will take you over nine years and more than $3,700 in total to pay off.
Avoid Depending on Your Credit Card
The TD Canada Trust poll found that 18 percent of respondents use their credit cards to supplement their income, and 14 percent routinely max out one credit card and need another as backup. If you find yourself frequently using your credit card for necessities, you are likely living beyond your means. Using credit to pay off another credit card is a clear sign of being overextended.
Though mismanaged credit cards can lead to financial trouble, a well-managed account is a critical step towards financial responsibility. “Using your first credit card responsibly is a smart way to establish a strong credit rating and help set yourself up for an attractive interest rate when you apply for your first car loan or mortgage,” says Stephen Menon, associate vice-president of credit cards at TD Canada Trust.
By following these tips and educating themselves, young Canadians can use their credit cards wisely and build a solid financial foundation for the future.
