The Legacy of Credit Management

“The creditor hath a better memory than the debtor.”
(James Howell 1594-1666)

Manage your credit cards carefully when you are young to avoid credit problems later on.

When young people enter the workforce, the first
thing they often do is get a credit card. Unfortunately,
they frequently don’t understand credit and
can easily and quickly get into trouble. Many do not
realize that making credit mistakes can affect their
credit rating and create problems when they want to
buy a house or car.

Let’s look at a problem that can easily arise. A smart
phone is probably one of the first things a young
adult wants to buy. Usually a two-year contract is agreed for a set monthly fee. If the monthly
payments fall into arrears, the provider will send
invoices, emails and make telephone calls until the account is sold to a collection agency. Being remiss on
$400-$500 may seem trivial and easy to rationalize;
failure to pay, however, could create an insurmountable
obstacle later on when credit is needed most.

Credit Agencies

Most creditors rely on the data gathered by Equifax
Canada or TransUnion Canada when processing a
credit application. Both agencies obtain information
from sources such as banks, department stores and
collection agencies as well as public records that record
judgments or wage garnishments for failure to pay
debts. In essence, every time credit is used or abused,
these agencies may be able to access the information
to determine your credit worthiness.

Credit scores are determined on a point scale that
ranges from 300-900. A score of 300 means obtaining
a loan will be almost impossible. A score above 650 is
a realistic target to obtain and maintain. About 86% of
Canadians are in that range, according to the Financial
Consumer Agency of Canada. To put this in perspective,
the Canada Mortgage and Housing Corporation
refuses to insure a mortgage if the prospective buyer
cannot put down a minimum of 20% of the purchase
price. Thus, if a first-time homebuyer is unable to come
up with $60,000 on a $300,000 condominium because
of a credit score below 600, it is unlikely any financial
institution will issue a mortgage.

A Good Place to Start

Check with the credit agencies to determine whether a
false credit report has been opened in your name. Many
individuals between 18 and 21 have had cell phone
contracts opened in their name because someone stole
their identity by taking pictures of their driver’s licence
or Social Insurance Number (SIN) card. With this
information, it is extremely easy to open an account
and run up a large balance. Because young adults often
move for work or education, they may not even know
that an outstanding bill exists in their name.

Establishing and Maintaining a Good
Credit Rating

There are three main ways to stay out of trouble:

1. Maintain bank accounts with a reasonable balance
   and avoid using any overdraft facility. Lenders
   will request information about both chequing and
   savings accounts.
2. Maintain steady employment and constant income.
   Lenders need to know you have the ability to pay.
3. Pay all your bills on time. Lenders need to establish
   that you are reliable and conscientious.

Young adults may need a co-signer for a credit card or
loan application. This benefits the borrower because:

• the lender will not have to make a credit decision
  based solely on a limited credit history
• the young borrower may be able to obtain a lower
  interest rate since the guarantor has an established
  credit history. Family members are a good bet
  since the lender can be confident the guarantor
  will be reachable and accountable.

Multiple Cards

It does not hurt to apply for a credit card from the
larger retailers or gas companies. Usually these
starter cards offer a $500 maximum borrowing limit.
Do not apply for more than a couple of cards since
the lender may become nervous about 10 cards with
$500 limits creating a potential debt of $5,000. Pay
on time and in full.

It is best if the balance never exceeds 30% of the credit
limit.

Avoid using a card from one institution to pay off a
card from another. Fifteen per cent of your credit score
is based upon the length of time the card carries the
debt. Creditors become nervous when a borrower starts
flipping debt from one institution to another.

Student loans are non-dischargeable through
bankruptcy within seven years of graduation.

Student Loans

Ignore student loans at your peril. Once it is time to
start repayment, stick to the schedule. Once payments
are missed, your credit rating will be in jeopardy.

Student loans are non-dischargeable through bankruptcy
if the bankruptcy is declared within seven years
after studies end. This means that, even if all your
other debts have been discharged, you must still repay
the student loans.

Employment History

Creditors look to a history of stable employment as well
as the consistency of salary or wages. For the young
adult, job history is problematic. Young adults may have
difficulty finding employment and, in any case, employment
history will be short. Nevertheless, your credit
score is better if you can remain with one employer.

Non-Payment of Rent

Eviction for non-payment of rent will not only impact
your credit rating but may make it difficult to find a
new place to rent. Don’t jeopardize your credit rating
by not living up to the rental agreement.

Bankruptcy

Because bankruptcy stays on your credit rating for
at least seven years (more if you have multiple bankruptcies),
it may be impossible to get vehicle loans, mortgage loans or lines of credit in the future. Even
if loans are granted, the interest rates will be higher
according to how you are perceived as a credit risk.

Criminal Record

Criminal convictions stay on the credit report for seven
years. A criminal record will hurt any attempt to get a
job that requires bonding. Travel may also be restricted
as many countries bar travellers with a criminal past.
A lack of mobility may affect your employment opportunities
and thereby impact your credit rating.

Unpaid Taxes

Pay your taxes as you go. The nonpayment of taxes
stays on the credit agency files for seven years.

A Good Credit Rating Is a Necessity
of Life

At times, credit is needed to obtain some of the expensive
necessities of everyday living such as a vehicle for
work or a home to live in. Good money management
combined with the understanding that building a solid
credit rating will enhance their life should be a priority
for the young adult working toward building a solid
and secure future.