Give us some credit
Give us some credit
By Warren Flood
Credit, credit on the wall, who's the fairest of them all? Unfortunately, if you are a student or recent graduate, it's probably not you.
Obtaining credit can be a vicious circle you generally need a credit history to get credit, yet having credit is the only way to get a credit history. Is there any way out of this hideous trap? Is it possible to get the credit you believe you deserve?
Why obtain credit?
A credit history may seem like a foreign concept to many students, but in a few years time they may come to find that not paying those Visa or gas bills on time has made them fairly unpopular with the banks. A credit history is a must for anyone wanting to obtain a loan or mortgage through a financial institution.
A poor credit rating can hinder a student's future endeavours, says Bobby Fitzsimmons, assistant manager of unsecured lending at Canada Trust. "Students don't understand the consequences. Your credit history is used to judge how responsible you are. Whether true or not, it can stigmatize you," she says.
Banks aren't the only businesses concerned about credit worthiness. "Most major companies, when hiring, do credit checks to judge your character. You may be the best candidate for the job and not be hired because of a poor credit history," Fitzsimmons says. Also, some landlords do credit checks before renting to students.
First time credit
A student credit card is a good way to establish credit. Fitzsimmons, though not referring to Canada Trust policies, offers her advice about credit cards in general. "As a university student, you have an advantage banks go to campuses to solicit your business and qualifications are less strict," she explains.
If one does not qualify on her or his own, Fitzsimmons suggests asking a parent to co-sign. "If you get a co-signer, make sure you are the primary cardholder, not the secondary you want the payment history to report in your name."
If a co-signer is not a viable option, Fitzsimmons says to apply for a department store card. These cards are easier to obtain because spending privileges are limited to one store. As well, their much higher interest rate (usually 28.8 per cent per year) allows department stores to assume more risk when granting credit.
Fitzsimmons says to use the card at least once a month, regardless of the dollar amount and pay at least the minimum payment, on time. It takes only six to 12 months to establish a credit history.
One of the best ways to establish credit without over-spending is to charge a monthly subscription or membership to the card, Fitzsimmons suggests. Make payments on time and keep the card locked away for safekeeping and the monthly purchase requirement is satisfied without buying unnecessary items.
What are credit bureaus?
National credit bureaus compile and provide credit histories for lending inquirers, such as banks. However, these reports sometimes contain errors and may result in credit being denied.
Students can get a copy of their personal credit report from Equifax Canada or Trans Union of Canada. "Obtain a copy of your credit bureau report and check it for accuracy, especially if you've been declined a credit increase," Fitzsimmons says. "These reports often contain errors. This should be done about every other year."
The bureaus need to be either faxed or mailed a photocopy of two pieces of identification (driver's license, birth certificate, passport or a social insurance card), a letter indicating current and former addresses, date of birth, daytime phone number and a signature, Fitzsimmons explains. Response time is usually three to six weeks.
Credit cards and personal finance
How should a credit card be used? "For students with a modest income, credit cards should only be used to the extent that they can be paid off when the amount comes due," says Darroch Robertson, a business professor who specializes in income tax planning at Ivey School of Business. "They should be treated like a debit card with a few extra days to pay."
Robertson says the biggest pitfall to using a credit card is not paying the balance in full when it comes due. "A month here or there is not a big problem, but don't fall into the habit of not paying your balance in full. This will only lead to less money in the future; money that you are paying in interest, which provides you no pleasure," he says. "And besides, pleasure is the purpose of money. Paying interest means less money to spend on fun things, such as evenings out, trips and toys."
Robertson wonders if credit card problems are more of an epidemic than they appear to be because of people's unwillingness to discuss their finances. "We'll talk about our car troubles or relationship troubles, but most of us are unwilling to discuss our financial problems until we are in way over our heads."
Bob Young, president of Credit Crisis Counselling Inc., does not see credit cards as beneficial in the long run, particularly for students. "Credit cards are debauchedly immoral," he says. "They are a student's biggest source of financial stress, second only to student loans."
Young has worked in the finance industry for over 40 years and has been counselling clients under severe financial stress for the last eight. As a credit counsellor, he sees first hand the physical, emotional and mental stress which credit abuse can cause.
"Credit cards do nothing to help alleviate the financial burden already felt by students."
The plastic bullet
Young warns how credit card companies target students for several reasons. With minimal income, students can rarely afford to pay their balances in full, resulting in interest charges. Students are already in the habit of borrowing and carrying large balances. Credit card companies are trying to create brand loyalty for the time when students enter the workforce and expect larger incomes and a more expensive lifestyle
But Young says too many students succumb to impulse purchases or worse, use credit cards to cover living expenses. "[Credit card companies] encourage you to load them up and take as long as possible to pay them off. But when you can't pay, they'll write [your account] off as bad debt, sending you into collections, while they get a tax break."
Young cites one example of a client, a single mother earning less than $20,000 per year, who accumulated over $54,000 in credit card debt. This client, in order to avoid collection agencies, eventually claimed bankruptcy.
"Credit lenders are less concerned with your ability to responsibly use credit and are more concerned with how much interest they can earn off you," Young says.
Bankruptcies remain on credit bureaus for seven years, severely limiting the chance of re-establishing credit during this period. Recent changes to the Bankruptcy and Insolvency Act have also made discharging student loans by declaring bankruptcy less of an option.
Young stresses the importance of paying at least the minimum payment on time. A payment which is just one day late is no different than a payment which is 30 days late they both report to the credit bureau as an R2 late payment. A payment less than the minimum amount will also report as a late payment, no matter how small the requested payment is.
Young's final advice to avoid the trap of "buy now, pay dearly later" credit cards is to keep card limits at $500 and keep them at home, where they can be hidden safely away from temptation.