You are going to be offered a credit card soon. Maybe you already have one.
The bank will call it a starter card or a student card. The limit will probably be $500 or $1,000. The offer will seem reasonable. The fine print will mention an interest rate, and you will not think much about it.
The offer leaves out the part that matters. A $1,000 balance at 19.99%, paid down at the minimum each month, takes more than eight years to clear, and depending on how your bank sets the minimum you pay somewhere between $800 and $1,000 in interest on top of the $1,000 you borrowed. You borrowed a thousand and paid back close to two thousand.
Understanding this before you carry a balance for the first time is one of the most useful things you can learn about money.
How Interest Works Against You
Interest is the price of borrowed money. When you borrow $100 and the lender charges 20% per year, you owe $120 at the end of the year. Simple enough.
The problem is compounding. If you only pay a little each month, the interest gets added to your balance. Next month, you are paying interest on a larger number. The month after that, larger still. The balance grows even when you are making payments, because the payments are smaller than the interest being added.
This is the same math that makes investing so powerful over time. Money compounding in your favour grows into more money, and debt compounding against you grows into more debt, by the same principle running the other way.
Most Canadian credit cards charge between 19.99% and 22.99% annually. At 20%, a $500 balance you do not pay off costs you $100 a year in interest, which sounds survivable until you remember that most people who carry a balance carry more than $500, and carry it for years.
The Debt You Will See First
At 16 to 19, a few kinds of debt will cross your path.
Buy Now Pay Later. Afterpay, Klarna, and similar apps split purchases into four payments spread over six weeks. They appear at checkout when you are buying clothes or electronics online, and they are easy to click through. The first payment comes immediately; the rest follow automatically.
Miss a payment and there are fees. The habit costs more than the fees ever will: you get used to spending money that is not in your account yet, and that habit scales badly once the purchases get bigger.
Credit cards. Banks start offering these at 18. Your first one will probably look like a good deal, with a low limit and no annual fee, and the points program will seem like a bonus. Credit cards are genuinely useful tools when you use them right. But carry a balance once and you will see how the interest statement looks. A lot of students graduate with several thousand in credit card debt on top of their student loans. It adds up faster than you think.
Student loans. If you go to university or college in Ontario, you will likely encounter OSAP. Government student loans charge lower interest than credit cards, and the government pauses interest while you are still in school. But the balance is real money you owe when you graduate. Read the terms before you sign. Know what the repayment schedule looks like.
Car loans. A $10,000 used car at 8% interest over four years costs you roughly $1,700 extra. That is not a disaster if the car is reliable and you can afford the payments. But some dealers target young buyers with higher rates, and some buyers finance more car than the job requires. Know what you are signing before you sign it.
What Nobody Tells You About Carrying Debt
The math is the part you can see on a statement. The other cost is harder to measure, and it lands earlier.
Most people carrying consumer debt keep the real number to themselves, parents included. The balance sits in the background and steers more decisions than they would guess. They stop thinking about the future, because the debt makes the future feel smaller, and they spend on small things because the big picture is too heavy to look at.
That weight is real, and it starts earlier than most people expect. A $2,000 balance at 19, paid at the minimum, can follow someone into their thirties. By then it is a problem that reaches well past the account balance, into how you think about your future and how honest you can be with the people closest to you.
You do not have to learn this one from the inside.
How to Tell Debt That Builds Something From Debt That Just Spends It
Debt comes in more than one kind, and the difference is worth knowing before you sign anything.
Debt that builds something can make sense. An OSAP loan for a program with a real career on the other side, or a small loan to buy equipment for a business you are starting. The thing you are paying for is going to generate more value than it costs.
Debt that funds your life right now is the kind to be careful with: charging things on a credit card you could not afford to buy with cash, or using Buy Now Pay Later on stuff you will not remember by next month. A car loan for more vehicle than the job needs lands in the same category.
The question to ask before you borrow: will this thing be worth more to me than what it costs me to repay? If the answer is yes, the debt might make sense. If the answer is no, you are borrowing from your future self so you can spend today.
One Rule That Covers Almost Everything
Pay your credit card in full every month, starting with the first statement.
Use your first credit card the way you use a debit card. Only spend what is already in your account, and pay the full statement every single month. If a month comes when you cannot pay the full balance, stop using the card until you can.
A lot of financial trouble starts with one month of carrying a balance. The next month it is a little bigger, the minimum payment has become the normal payment, and before long the balance is climbing. A few years of that and you have a problem that takes years more to fix.
The credit card companies are counting on exactly that sequence of events. That is their business model, and refusing to play along is plain good sense.
If you are 17 or 18 and not confident you will pay it off every month, use a debit card or a prepaid card for now. Plenty of adults would have been better off making that same call at your age. The outcome to avoid is carrying $3,000 in credit card debt at 22 because you never set a firm rule at 18.
The Decision to Make Before the Card Arrives
Go to your bank's website and find the interest rate on their student credit card. Then search for a credit card interest calculator. Plug in $1,000 at that rate, minimum payment only, and see how long it takes to pay off.
The number will stay with you.
Then make one decision before you ever carry a balance: you will pay the card in full every month, starting with the first statement. Write it down and tell someone, so the rule exists before you need it.
What separates the people who stay out of consumer debt is mostly timing. They decided early, before the card showed up and before anything about it felt urgent.
Make your decision now, while it is still easy.