In the red

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As more young Canadians get their hands on credit cards, wallets often wind up filled with more plastic than cash. But racking up credit card debt can end up costing more than just interest. Jeff Lagerquist and features editor Mariana Ionova report

Eighteen months ago, Tara Gianakacos found herself filling out the paperwork that would change her life. She would no longer be able to get a lease, book a vacation or buy a pair of shoes online. At the age of 27, she had racked up $23,000 in debt and had to declare bankruptcy.

Gianakacos got her first credit card when she was just 17 years old and her limit had initially been a harmless $300. Her first purchase was a glistening, brand-new TV.

Soon, her credit limit grew—almost as quickly as her expenses—and she came to rely on her cards for nearly everything. Part of the problem was that Gianakacos was able to withdraw cash advances, which meant that she could turn to her credit cards every time she spent her pay cheque too quickly and couldn’t make her rent.

“When I found out [I could withdraw cash], I was like ‘Woohoo, now I have all this money.’ But it’s really not yours.”

Gianakacos was struggling with the minimum payments on her credit cards and before long, she was drowning in debt and dodging collectors.

“It got to the point where I had creditors calling me and making me cry. I was so scared and sad, I just wanted to start over.”

So start over she did, filing for bankruptcy and putting a black mark on her credit history for the next seven years.

“After years and years of being hounded by these people, I decided to file for bankruptcy because it just got that bad,” she said.

The problem does not solely affect Gianakacos. Most Canadians rely on credit cards and rack up debt in much the same way. In 2009, there were 72 million credit cards in circulation in Canada—more than two per person. More than one-quarter of Canadians carry a balance on their cards month over month, according to the Canadian Bankers Association. In 2009, there was a total of $78 billion in outstanding debt across the nation.

Post-secondary students are the demographic most vulnerable to accumulating credit card debt because banks are serious about putting plastic in their wallets.

Financial institutions target the post-secondary demographic in hopes to build a generation of financial relationships they can bank on for years to come, according to Graham Flanagen, Scotiabank manager and professor at the University of Toronto. “You have to grow your future clients,” he said.

Starting off on the wrong foot financially can have serious consequences for students. Credit bureaus track individuals’ ability to make their monthly credit card payments and give them a credit rating according to their financial history. Those who have trouble paying their bills on time are assigned a low credit score and deemed high-risk clients. Banks and credit card companies then use credit scores to determine whether someone can be trusted with a loan or a credit card and how likely they are to pay back the money they borrow.

But financial institutions are not the only ones who look at credit scores. Phone companies, insurance providers, employers and landlords also evaluate credit ratings and students who have a poor credit score often have a hard time landing an apartment lease, financing a car or even getting a cellphone contract.

Edward McDonald, manager of the Ryerson branch of Alterna Savings, said that something as simple as forgetting to pay an outstanding credit card balance can leave a lasting impression on students’ financial records. “If you’ve had challenges against your credit history it will have major effects in the future.”

McDonald added that many students use credit cards recklessly without realizing how much damage they can do when it comes to getting an apartment, a mortgage or a loan later on in life.

“Credit cards are great, but students have to realize that they are not meant to supplement their limited incomes,” he said. “It seems that young people are ultimately drawn in by the easy availability of credit. When they get it they feel compelled it use it.”

Even though credit cards are tempting, Financial Post personal finance columnist Jonathan Chevreau thinks spending money you don’t have is a bad idea for cash-strapped students.

“It’s hard to refute the idea that a credit card is useful, especially for emergency purposes, but for the most part the average student doesn’t really need one.”

For Gianakacos, filling for bankruptcy has meant she had to learn to live without credit cards, loans or financing. But she thinks that young Canadians are just not fully prepared for the responsibility of credit cards and often end up making serious mistakes early on.

“It does make life a lot easier but only if you know how to use it,” she says about the plastic cash. “You go out in the world not knowing and end up screwing yourself over.”

Even though it will take seven years for her credit history to be cleared, Gianakacos would rather deal with that than live with the anxiety of debt.

“Sure, I have to start over but I’d rather owe nothing to anybody than to have to feel that stressed out on a daily basis and wanting to change your phone number because you just don’t want to deal with it anymore. “

Gianakacos plans to go back to school and study naturopathic medicine but, since she is not longer eligible for a loan, she has to wait until she has the money to pay for it.

“Now, my lifestyle has become whatever’s in my pocket is what I have.”

Photo: Lindsay Boeckl

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