Several major banks in Canada are offering seemingly innocuous, special credit card deals to university students. The offers feature zero annual interest, even for students without any credit history. While such deals hold many advantages for the average student, they may also pose, many unforeseen problems.
“Many of our students have had good experiences with the credit cards,” said Yvonne Hilder, Woodsworth College financial advisor, adding that credit cards can be a good way to build up a credit rating. Credit ratings reflect a person’s ability to borrow money responsibly: the higher the score, the better. Considerations for credit rating include payment history — whether or not bills are paid on time, and how close to the credit limit the person is.
Credit or bust
“A student loan is often not enough to cover the basics, or it comes in with two installments so you have to be careful with your budget,” said Hilder. Student credit cards can be used to supplement budgets and are sometimes necessary for online shopping. “A lot of companies prefer that you pay by credit card… If you’re buying things online, it’s handy to have a credit card to do those payments,” Hilder said. Students looking to rent textbooks from the U of T Bookstore must have a credit card.
However, Hilder cautions against the negative aspects of students using credit cards. “Many students have had unfortunate experiences… and have incurred a lot of debt.”
A common way of incurring debt comes from relying on credit cards to cover a majority of basic essentials, rather than using the credit cards as supplements. “Students using the credit card to cover the basic essentials of life — if you’re buying your groceries on a credit card, if you’re paying your rent with the credit card — that’s a problem,” said Hilder.
Hannah Hunter*, a U of T alum who majored in political science and environmental science, used her credit card to purchase daily expenses such as food and TTC passes during her time as an undergraduate. “It was very good that I could pay for essentials. But [it was] bad when I couldn’t pay them back at the end of the month,” Hunter recalled.
As a consequence, Hunter fell into debt. “At the very least, I was able to pay the minimum payment but not the full balance, even though I knew a high interest rate would be added to the remaining amount.”
“My account was eventually passed onto debt collectors and I managed to establish payment plans… until I paid off the debt in full,” Hunter said.
Influence on campus
Ben Coleman, president of the University of Toronto Students’ Union (UTSU), said that creditors and financial institutions are occasionally present on campus. “[We] do occasionally have sponsorship agreements with financial institutions (e.g. for orientation), but we are very clear that they should not advertise credit cards,” he said.
“The only company authorized to offer a credit card product on campus is our affinity partner, MBNA Mastercard,” said Althea Blackburn-Evans, director of news & media relations at U of T. “MBNA is a leader in providing these programs to many universities in Canada, and there is an ongoing interest from students and alumni in this offering.”
“MBNA is also a pillar sponsor of the university, and those sponsorship dollars are completely redistributed to over 40 student and alumni initiatives… Student groups who organize fairs or festivals, like the UTSU street festival, may invite other financial vendors to sponsor their events but those vendors are not permitted to market credit cards to students at the events,” Blackburn-Evans added.
Is bankruptcy a viable option?
Steve Jameson*, a third-year English major at U of T, told The Varsity how he claimed bankruptcy and felt that banks and creditors view students merely as numbers and ‘cash cows’ for high interest rates, when asked whether he was concerned about the appearance of bankruptcy on his credit history.
“Bankruptcy is a tricky thing, and can be a blessing or curse depending on the case of the individual.” He added that he does not think it is uncommon for students to claim bankruptcy while they study.
The National Student Loan Services (NSLS) confirmed the high frequency with which students declare bankruptcy. “I usually see an account call in that has claimed bankruptcy every shift I work,” said an NSLS representative.
However, there are limits. Bankruptcy cannot be claimed on Ontario Student Assistance Plan (OSAP) loans unless the loan is at a minimum of seven years old. Bankruptcy will stay on your credit history for seven years, but the bankrupt can receive credit cards and begin reestablishing good credit nine months after initially filing for bankruptcy and being discharged.
Those who have filed for bankruptcy have also been granted mortgages by banks within two years of a nine-month bankruptcy discharge. In Canada, lenders want you to be cleared of bankruptcy for at least two years.
To help avoid going into debt, Hilder provided some practical advice. “Shop around… ask questions: what is the interest rate if you can’t pay off the monthly balance? A lot of [student] credit cards are in the range of about 19–20 percent.” Interest rates for RBC’s student credit cards and Capital One’s Vibe Mastercard are 19.99 per cent and 19.8 per cent respectively.
Does the zero-annual fee compensate for the relatively high interest rates of student credit cards? For Hilder, it does not. “They may say that there’s no annual fee but there’s a lot of low interest credit cards that will have a modest interest fee. If you do the math… it’s actually a better deal.”