'Buy now, pay later.'

• When should you use a credit card?
• What are some factors to consider when choosing a credit card?
• What are the costs of using a credit card?
• What are credit scores and how can you build your credit score?

• Only use a credit card to pay for items that you will be able to pay off in full at the end of the month.
• Say 'No' to anything that will tempt you to carry a balance (and save up for it instead).
• Live within your means (that means spend less money than you earn each month).

• Good budgeting skills can help you do that.
• Practice the skill of budgeting with our budgeting workbooks.  You can find these workbooks on our site under 'EXPLORE'.

For each question below, indicate if you should pay for the item using a credit card. 

Q1. Pay and book a hotel room for a trip with your friends. 

Q2. Pay for your student loan. 

Q3. Pay for a $300 Amazon.ca purchase. You earn $750 from your part-time job each month and live at home so you have no additional expenses. 

Q4. Pay to repair your car. On your way to work today, you experienced a flat tire.    

Q5. Pay for an expensive watch you are buying for your best friend’s birthday. You are a full-time student and do not earn any income. 

Link to TD's Cash Back Card: https://www.td.com/ca/en/personal-banking/products/credit-cards/cash-back/cash-back-visa-infinite-card/

Credit Limit: The maximum amount you can borrow (i.e. spend using your credit card).

Considerations:

• A credit limit should offer flexibility, but not be too high that it offers more temptation to spend than you can manage.
• As a student, start with a low-limit card to practice and get familiar with the credit card purchase and repayment process.

Interest: The cost of borrowing money by making purchases on your credit card.

Considerations:

• One advantage of a credit card is that you can avoid interest costs by paying the balance owing on your credit card in full each month (by the due date).
• Credit card interest is typically much higher than other types of credit (eg. bank loans and lines of credit).

Annual percentage rate (APR): The rate of interest charged on credit card purchases, stated as a yearly rate.  This is the rate you will find in your cardholder's agreement or on your credit card statement.

Considerations:

• To determine what interest you will pay in a given period of time, you need to convert the APR to a periodic rate first.
• Periodic interest rate = APR/N, where N = number of periods in a year

e.g. calculate the monthly interest rate

• APR = 12%
• N = 12 months in a year
• Monthly interest rate = APR/N = APR/12 = 12%/12 = 1%/month

Minimum payment: The minimum amount you must pay each month to keep your account in good standing.

Considerations:

• Paying the minimum balance each month keeps your account in good standing and avoids additional penalties, but it does not avoid interest costs.
• If you can only make your minimum payment each month, you are not living within your means and it might be time to ask for help from a credit counsellor.

Annual fee: An annual fee charged by the credit card issuer for the use of the card.  Some credit cards, like student credit cards, may not have an annual fee.

Grace period: The time between the statement date and the payment due date.

Considerations:

• A grace period only applies if you pay the balance in full on the payment due date.
• In Canada, the grace period is approximately 21 days in length.

Which of the following terms describes how much interest you will pay on your credit card if you only pay the minimum balance each month?

You make a purchase on a credit card on November 15th. Your credit card billing cycle is October 25th to November 24th. Your payment is due on December 14th. Which of the following represents the interest free grace period?

Credit card rewards

Rewards and benefits:  You can earn discounts on products and services or get cash back when you use your credit card to purchase goods and services.

Student credit card rewards: A Student Discount Card (eg. SPC), provides discounts at specific retailers.

Considerations:

• Consider what benefits make sense for you.  If you don't travel much, travel benefits are of little value to you.  Ask yourself how likely you are to use the benefit and weigh that against the cost you pay for those benefits (the cost might be in the form of an annual fee).

Beware!

• Carefully read the terms and conditions. Watch out for:

• Low interest credit cards
• Cash advances

Take a look at this credit cardholder's agreement from PC Financial Mastercard and see if you can identify some of the credit card terminology you just learned about.

Remember - the cost of borrowing money is interest.  Interest is a cost to you, the borrower, and interest is income to the lender.

How to calculate interest on a credit card

Example: You have a travel rewards credit card and an average daily purchase balance of $1,500 at the end of your 30-day billing cycle this month. The APR stated on your credit card agreement is 15.99%. How much interest is charged for this billing cycle if you do not pay your balance in full on the payment date

Step 1: Divide the APR by the number of days in the year.  This determines the daily interest rate.

    0.1599 / 365 = 0.000438

Step 2: Multiply the daily interest rate by the average daily balance.  This determines the interest charged per day.

            0.000438 x $1,500 = $0.657

Step 3: Multiply the interest charged per day by the number of days in your billing cycle.  This determines the interest charged for that billing cycle.

    $0.657 x 30 = $19.71

Susan was given a credit card with an APR of 24%. What is the monthly interest rate (exclude % sign when entering your response)?

Denny was travelling this month and paid for all of his travelling expenses with his credit card.  During the month he made $3,500 of travel related purchases.  When his credit card statement arrived, Denny paid the outstanding balance in full by the due date.  How much interest did Denny pay assuming his credit card has a 12% APR?

You want to buy a new laptop which costs $650 at the store. You pay for it using a credit card that has an APR of 19%.

If you only pay the minimum monthly payment of $21.45, how long will it take you to repay this purchase on your credit card?

MS Excel:

​​​​​​

What is the total amount you will pay for your laptop?

You pay $21.45/month for 41.57 months.

Total amount paid = monthly payment * number of months

Total amount paid = 21.45*41.57 = $891.68

What is the cost of using a credit card to make this purchase?

Cost of using credit = total amount paid – original cost of the product

Cost of using credit = $892 – $650 = $242

• Live within your means.
• Make a budget and monitor it regularly.
• Stop and think - is this purchase necessary? Do I need to purchase it today?

• Credit scores (FICO scores) are based on your credit history and are maintained by credit-reporting agencies such as Equifax and TransUnion.
• Your credit score is an indication of your credit risk - the risk that you may not be able to repay the amount borrowed.
• Scores typically range from 300 to 850, the higher the score, the better.

FICO Score Ranges:

There are a lot of factors that go in to the determination of a credit score.  Test what you know by reviewing each of the factors below and indicating if it would have an impact on your credit score.

Q1. Closing/cancelling old credit cards.

Q2. Your age. 

Q3. Your income. 

Q4. Paying late.

Character, Capital and Capacity

Character - determines how reliable you are to repay what you owe.

• Review credit history - the past is an indication of the future.
  • Do you have a history of missed or late payments?
• Review your stability.
  • How long have you lived in your current home?
  • How long have you worked for your current employer?

Capital - your assets and income.

• If you can't repay what you borrow, what assets (eg. property, savings, investments) do you have to offer as collateral (a form of security for repayment)?
• What's your current income?  The higher your income, the more likely you can manage the repayment and costs which helps the lender feel more comfortable lending you money.

Capacity - living within your means.

• What other amounts to you owe?
• How do your expenses compare to your current income?

You are the Account Manager at SAF Bank. Two individuals have applied for SAF Bank’s 2% Cash Back Credit Card.  

Jessie: A fourth-year Accounting and Financial Management student at the University of Waterloo is applying for her first credit card. She lives off-campus and has been paying her rent and utility bills on time using her debit card. She has a BMO Savings Account and her parents just gave her a car for her birthday. Jessie has been working part-time at a local accounting firm for the past 3 years and has an offer to return to work there full-time when she graduates.    

Kyle: Graduated from university 5 years ago and works full time at his father’s car dealership. He is applying for his third credit card as he is in need of additional credit. Kyle is not overly careful when it comes to paying his bills.  Although he is earning an income, he often misses his bill due dates and makes his rent and credit card payments late.  Sometimes he is only able to make the minimum payment that month. The extra money that he has, he invests in stocks. Unfortunately, the COVID-19 pandemic has caused a number of his stocks to drop in value but he is hopeful that when the pandemic ends, things will recover. 

Q1. Use the drop-down menu on the left to select the specific characteristic that matches the statement on the right.

Q2. Between Jessie and Kyle, who do you feel more confident providing a credit card to?

Q3. Use the textbox below to type in what advice would you give Kyle to improve his credit score and increase the likelihood that his future credit card applications will be accepted?

Q3. Feedback

Possible recommendations for Kyle could be: 

• Create a budget and monitor money going in and money going out to ensure he is living within his means. 

• Extra money should be used to pay down expensive debt (like credit cards) first before investing in stocks 

• Set reminders to ensure bills are paid on time. 

• Only use credit to make a purchase if you are able to pay it back in full at the end of the month.  If you can’t, wait.  Save any extra money you have until you can make that purchase without relying on the credit card. 

• Stocks can be risky.  If you have extra money to invest, make sure to diversify your investments to minimize the impact of a volatile market. 

• Get started building your credit score with a low-limit credit card and use it responsibly.
• Pay your bills on time.
• Pay the balance in full each month. If you can't, make sure to pay the minimum amount to keep your account in good standing, but don't make that a habit. 
• Live and spend within your means. A credit card doesn't make something affordable. If you can't afford it, don't buy it!
• If you need help, ask! Reach out to a credit counsellor or speak to your lender. During the pandemic, many lenders were willing to work with borrowers to manage their financial difficulties. 

Congratulations! You did it!

You're on your way to becoming credit smart!!

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