Img PigBuild your credit score the earlier the better

For many young Canadians, the sixteenth birthday is a very special day. My son Max turned 16 last month, and he asked me to pick him up from school on his lunch break, and take him to the Driver’s License office. He took the written test, passing comfortably, and is now proudly sporting one of the Ontario Government’s sexy new driver’s licenses in his wallet.

And when they hit nineteen, many will walk confidently into the LCBO for the first time (at least we hope it’s the first time :<) – just hoping the cashier will card them and ask for ID.

Age eighteen is less well known as a big day for young Canadians – but that is the day you can begin to build your own personal credit history.

Although I see credit at the root of so many household problems, I do believe fanatically in the importance of building and maintaining your own credit history. Yes, too many debts is an oft cried mantra, but to address that we need to work harder at consumer education and the development and reinforcement of good credit and spending habits.

[important]To put it bluntly, life is better when you have a strong credit history. In a society whose very foundation is credit based (mortgages, car loans, furniture loans, household goods loans, etc.) and where credit is a standard method of payment, you gotta have it.[/important]

Some employers prior to offering you a job require a credit inquiry. Renting an apartment? – there too. Taking out insurance on your property (either as a homeowner or as a tenant) – they may want to check your credit. Want to get the latest smartphone for $0 down and a 3 year plan? Better have a clean credit history.

Over the years, we have helped hundreds of young adults build their credit history. Our success rate is phenomenal – they really do respond to the challenge; they totally absorb the lessons we teach, and they are not ashamed to come back now and then to check in to make sure things are still going well.

We have several interesting stories we share with them about their peers – one or two examples of credit reports gone bad ( lessons not learned) but more often amazing credit reports where the person has the financial world by the tail.

The only downside to our approach is that creditors literally throw themselves at our young clients – granting large sums of available credit at a very tender age. Interestingly, for most it’s not a problem – so focused are they on maintaining their excellent credit rating, they simply tune out the stuff they don’t need.

In the beginning

Most teenagers have a bank account by the time they hit eighteen. Your first port of call is your local bank branch and ask them for a credit card. Your limit will likely be $500 – maximum $1,000 – though it really does not matter which – you have no intention of using all the money.

Presumably you are either a student or you are in the work force already – the banks understand this may be the best time to build a long term relationship with you – so they are very receptive.

Most industry experts will advocate you use this first card for at least six, maybe twelve months, before you think about applying for a second card somewhere. And when you do, if you have been using the first card properly, you will already have a decent credit score and the second card should not be too difficult.

In my experience, many Canadians choose a store card as their second credit card – like a Canadian Tire card, or maybe Sears. Seems to me the acceptance rate is high.

Personally, I prefer my clients have no store credit cards – I don’t have any, nor (I think) do any family members.

[important]Our preference is to work with Triple A card issuers only – their heavyweight status in the industry counts for more in building your credit score.[/important]

And ideally, our young clients apply for their second card at the same time as they apply for their first card – presenting the same reasons as before – to a second bank.

The benefits of doing so are many – including :

  • When you apply for your first credit card, there are very low income and employment requirements. Thereafter, these become far more relevant factors.
  • You will develop a relationship with two banks. You can judge their service and compatibility with you – and decide which one deserves more of your business in the years ahead as you grow financially.
  • In terms of putting some meat on the bones of your credit history – two sources of credit are better than one.

Here’s a story which illustrates that last point ……………………………………………………>

A few months ago we were helping a young couple who wanted to apply for a joint personal line of credit. He was highly educated and working in advanced technology, and had used a $2,500 visa card in a very responsible fashion for three years. It was his only credit card. His credit score at Equifax was a highish 788.

His wife was in her last year of a PHD program. She did not have a credit card in her name – she did carry a supplemental card under his primary visa card.

They had good savings, plus small RRSP’s, an old car with no lease or loan, a respectable income, and a high credit score – but they were declined at two major banks – including the bank which had all their accounts. The main reason – insufficient credit history. (She had no credit history, and his was based on only one card)

Three years ago, this reaction from lenders would have been unfathomable, but the lending environment has really tightened up since the Recession hit in 2008.

This rejection by the banks towards two very decent clients may have been avoided had they both built their credit history equally over the prior few years – and with two cards rather than one.

It is ironic – they believed they had used credit in a highly responsible way (they did – it’s true !) but their prudence hurt them rather than helped them.

As we always tell our credit seeking clients – banks really do like to lend money – it’s their business. But, they prefer to make money available to people who look like they don’t need it.

Most people wait till their needs are acute, when they are already in some measure of debt stress, and that is a red flag to an otherwise happy lender. In our experience, the best time to arrange credit is when you don’t really need it. This is when you will look strong and attractive to lenders.

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