Stories abound about the horrors of easy credit and getting buried in debt, even before they get their career started. Like the twenty-something who is working full time to keep up with the minimum payments on $24,000 of credit cards and a $16,000 Line of Credit. He is now looking at student loans to go back to school. It will be a long time, short of declaring personal bankruptcy, before he gets his life back. He really needs to continue working, at least part time, to maintain his credit record.
The other side of the coin is the lady in her early thirties who has been diligently building her career, has managed her education without student loans and has avoided getting into the credit card trap. She now feels confident and secure in buying her first new car. The brand she likes has been advertising attractive financing. She visits her local dealer, selects her dream car and applies for the company’s credit. She gets turned down. “Why?” she asks, “I have been responsible, getting an education, working hard. I am established with my company, making decent money (finally!!) and expecting a promotion.” What she is missing is a credit rating.
There has to be a happy medium between these extremes of youth credit.
Getting credit is like getting your first (real) job. You take the right program, get decent marks, but find no one in your chosen field will hire you – you do not have experience! And how are you to get experience if no one will hire you!!?? Try volunteer work, unpaid apprenticeships and work in retail or labour that you could have gotten without the diploma or degree you slaved over the past three years. The analogy is that to get credit for your first major purchases, you need to establish a track record.
Equifax and TransUnion are the major keepers of your credit rating. Companies that give credit report your use of that credit. Whenever you apply for credit, you authorize a credit check. That company will go to the credit bureaus for a credit history and rating. If you have a history of maxing out credit and missing payments, or just of being a few days late in payments, your rating will be similar to that course where your term paper was late and your scores on pop quizzes low because you rarely did the assigned reading, relying on cramming for the final instead.
So how do you establish a credit rating? The same way you use the McJob to establish that you are responsible, show up on time and can get along with co-workers and customer, as demonstrated in the glowing reference letters that you then include with your resume. Employers do not really care if you got an A or an A+ in macro-economics. They care if they can count on you. It’s the same with credit. The financing company does not really care if you make $5000 a month and pay your card in full every month, even if a few days late. They care if you make at least the minimum payment, on time. In other words, you have a track record that shows the company giving you credit that they can count on you to keep to the terms of the credit agreement, just the same as a future employer wants to know they can count on you. So go ahead and get a credit card from a major issuer, and maybe a store card or two when they are offering special discounts to sign up. Then diligently pay them – on time! They are convenient and as long as you pay them off each month you avoid paying their ridiculous interest rates. Then when you go to buy that new car you will have a track record of reliability – leasing or financing will not be a problem.
If you may have already screwed up your credit, there are ways to rebuild it. You can still get a credit card where you put up security first (not to be confused with a prepaid card), then pay it each month on time. A good site for information is the Financial Consumer Agency of Canada which promotes financial literacy as the foundation for making sound financial choices www.fcac-acfc.gc.ca. In five years or so the negative stuff gets dropped off your credit history. Use the time to establish a track record of reliability and your credit will not be a problem again – because you have learned your lesson well.