By Fred Petrie
Getting credit is like getting your first (real) job. You take the right program at school, get decent marks, but find no one in your chosen field will hire you because you do not have experience. And how are you to get experience if no one will hire you? Credit works the same way. Lenders aren’t willing to give credit on large purchases if you don’t have experience or a credit history track record.
Two types of stories materialize with young people when it comes to handling credit. There are those who have gotten credit cards and get buried in debt. Like the 20-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. They now want to get a student loan to go back to school to get a better job. It will be a long time, short of declaring personal bankruptcy, before they get their financial life back. Further, they will need to continue working, at least part time, to maintain their credit record.
The other side of the coin is the person in their early 30s who has been diligently building their career. They managed their education without student loans and have avoided getting into the credit card trap. They now feel confident and secure in buying their first new car. The brand they like has been advertising attractive financing. They visit their local dealer, select their dream car and apply for the company’s credit. They get turned down. “Why?” the person asks. “I have been responsible, getting an education and working hard. I am established with my company, making decent money and expecting a promotion.” What they’re missing is a credit rating.
There has to be a happy medium between these extremes of youth credit.
So how do you establish a credit rating? The same way you use the McJob to establish that you are a reliable employee and to gain glowing reference letters to include with your resumé. 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 $5,000 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 contemplating giving you credit that they can count on you to keep to the terms of the credit agreement, just the same as the 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. Charge an item or two 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.
Companies that give credit, report your use of that credit to Equifax and TransUnion, two major keepers of credit ratings. Whenever you apply for credit, that company goes to the credit bureaus to access your credit history and rating. If you have a history of maxing out credit and missing payments, even if a few days late, 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.
If you 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 make your payment 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 at http://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.
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.
Fred Petrie, MLI Insurance, provides financial planning to families and independent businesses. He can be reached at 204-885-3438 or cellular 204-298-2900 or email firstname.lastname@example.org.