Lesson 22: Understanding Credit and Loans

1) Credit cards

A credit card lets you buy something now and pay later.

If you pay the full bill on time each month, you can avoid interest on most purchases. Many people use credit cards this way for convenience.

If you do not pay the full amount, the leftover balance starts to collect interest. Credit card interest is usually very high.

A common interest rate on Canadian credit cards is around 20% per year. Some are higher.

Credit cards also have minimum payments. Minimum payments feel “easy,” but they can keep you in debt for a very long time.

Story: Jayden and the “not that bad” balance

Jayden gets his first credit card after high school. At first, Jayden is careful.

Then a few things happen in a row. A phone breaks. Winter boots are needed. A friend’s birthday comes up. A few takeout meals show up too. Jayden looks at the balance and thinks, “It’s only $3,000. I can handle that.”

Jayden decides to pay only the minimum payment each month. This is where people get trapped.

Minimum payments are designed to keep the account active for a long time. That means lots of interest for the credit card company.

How credit card payments work (simple version)

When you make a payment, it goes to two places.

First, it covers interest and fees. Then, whatever is left goes toward the balance (what you actually owe).

If your payment is small, a big part of it can disappear into interest, and your balance drops very slowly.

Example: $3,000 credit card balance at about 20% interest

To keep the math simple, we will estimate. We will pretend the interest cost is about $50 per month on a $3,000 balance at around 20% interest. In real life it changes as the balance changes, but this shows the idea.

2) Car loans

A car loan is money you borrow to buy a vehicle.

Car loans usually have lower interest than credit cards, but you are borrowing a large amount. That means even a small interest rate can add up.

Car loans also have a set term, like 3 years, 5 years, or 7 years. You usually make the same payment each month.

The longer the term, the lower the monthly payment, but the more interest you often pay overall.

Story: Sam chooses a longer term

Sam wants a reliable used vehicle to get to a job in town.

Sam borrows $20,000 for a used car.

Sam is offered two choices.

A shorter term with higher payments.

A longer term with lower payments.

Sam chooses the longer term because the monthly payment feels safer.

That choice may be reasonable. But it also means Sam pays interest for more years.

Simple example: $20,000 car loan

We will use round numbers to show the idea.

Loan amount: $20,000
Interest rate: about 8% per year (rates change, but this is realistic for many borrowers)

Here is a simple comparison.

3) Student loans (Canada)

Student loans help people pay for tuition, books, and living costs while they are in school.

In Canada, students may have a mix of federal and provincial student loans. Some students also borrow from a bank, or use a line of credit.

Student loans often have lower interest than credit cards, and repayment can be more flexible.

Some students can pause payments for a period of time, depending on the program and rules.

Student loans can be a helpful investment in your future. They can also become stressful if the amount is large and income is low after school.

Story: Talia borrows for school

Talia starts a program after high school. Talia borrows money for school because the program is important, and it can lead to a career with stable pay. Talia also keeps the borrowing as low as possible by living at home and working part time. This is a common pattern.

Student loans can make sense. But it still matters how much you borrow and how long you take to pay it back.

Simple example: Paying back a student loan

Let’s use a simple number.

Loan amount: $15,000
Interest: (varies, but we will keep it simple)

If someone pays $150 per month, that is $1,800 per year.

If there were no interest at all, $15,000 would take a bit over 8 years.

With interest, it would take longer, unless the person increases payments over time.

Again, the idea is the same. Higher payments usually mean fewer years of payments and less interest.

4) Lines of credit

A line of credit is a borrowing limit that you can use when you need it.

You can borrow some, pay it back, and borrow again, as long as you stay under the limit.

Lines of credit usually have lower interest than credit cards, but higher than many student loans.

They are often offered by banks.

A line of credit can be useful for planned costs, like school, or for emergencies.

It can also turn into long-term debt if someone uses it for regular spending and only makes small payments.

Simple comparison: Credit card vs line of credit

a) Credit cards usually have higher interest. b) Lines of credit usually have lower interest.

But both can keep you in debt for a long time if you only pay the minimum or pay very slowly.

5) Buy now, pay later (BNPL)

Buy now, pay later plans let you get an item right away and pay in smaller chunks.

Some plans advertise “0% interest,” but that does not mean “no cost.”

Here is the catch.

Many BNPL plans charge fees if you miss a payment. Some charge interest after a certain time. Some make it easy to stack multiple plans at once.

BNPL can feel harmless because each payment is small. But several small plans can add up fast.

Story: Riley stacks payments

Riley buys shoes using buy now, pay later.

Then Riley uses it again for headphones.

Then again for clothes.

Each one is “only” $25 every two weeks.

But now Riley has 4 different plans running.

That is $100 every two weeks, plus regular bills.

If Riley misses a payment, fees can hit, and the plan can become expensive.

BNPL is not always terrible. It can be a tool.

The risk is when it turns into a habit and becomes normal spending.

6) Payday loans (high risk)

Payday loans are small, short-term loans that are meant to be paid back very quickly, often by your next payday.

In Canada, payday loans are known for being extremely expensive.

The cost is usually shown as a fee, like “$15 for every $100 borrowed.”

That sounds small, but it is huge when you look at how short the loan is.

It can act like a very high interest rate.

Payday loans can create a cycle.

You borrow to cover an emergency. Then you owe a big amount soon. Then you borrow again to cover the last loan. Then the fees pile up.

Example: Payday loan cycle (simple)

Let’s say someone borrows $300.

Fee example: $15 per $100 borrowed.

That fee would be $45.

So they might owe $345 very quickly.

If they cannot pay it back, they may borrow again, and pay more fees. This is why payday loans are often described as a last resort option. They are not “free help.” They are a very expensive product. The real heart of this lesson: How payoff works over time

Responsible borrowing (without fear or shame)

Responsible borrowing is not about being perfect. It is about understanding the deal you are making when you borrow. Here are habits that help.

Borrow for a clear reason, not just because you can. Know the interest rate before you sign anything. Know the fees. Ask, “What happens if I miss a payment?”

Avoid borrowing for wants if it will create stress later.

If you use a credit card, have a plan to pay it off fast.

Try not to choose the smallest payment just because it feels easier today.

If you are stuck, ask for help early. Talk to a trusted adult. Talk to your bank. Look for a non-profit credit counselling service.

A quick note about credit scores

You may hear adults talk about credit scores. A credit score is connected to borrowing, but we are not learning it in detail today. That is coming next lesson.  For now, the important point is simple. Your borrowing habits can affect your future options. So it is worth learning this now, before the stakes are bigger.

Final takeaway

Borrowing is a tool.

Tools can help, or they can cause harm, depending on how you use them. The most important thing to remember is this. Interest means borrowing costs extra. Time makes interest bigger. Small payments can keep you paying for years. A good plan, and steady payments, can help you stay in control.