It’s the old chicken and egg conundrum. You need credit, but you have to have good credit to get credit.
Perhaps you are a lady in your mid 50’s recently separated, not only are you dealing with the emotionally draining challenges of divorce and all that comes with it, but you also realize that the credit cards were all in your spouse’s name and he took care of all the bill paying arrangements. You suddenly find yourself as non-existent in the financial world of credit.
Or maybe you are a gentleman in your early 40’s, dealing with the aftermath of your ex spouses shopping addiction and maxed out joint credit cards or in your early 30’s finally with a stable job, just finished paying off your long overdue debts and want to start planning for the future. Or perhaps, a millennial starting university in the fall or beginning your family and buying your first home.
These scenarios share one constant factor; you need good credit to get credit and everyone needs credit. Regardless of your situation, your credit score is your report card to the world.
So where do you start? How do you establish good credit? Why is it so important?
Follow the 3 steps outlined below to begin building or rebuilding healthy credit for yourself.
Step 1: Apply for a Credit Card in your name
Try first with the bank that you have an active account with. Look for a card that doesn’t charge an annual fee, has a lower interest rate and has rewards points linked to it. Request a low credit limit to start out. For Students, they typically have a special card designed for you. Another option is a secured credit card, it requires a cash deposit that serves as colleterial if you miss a payment, the card is secured through a deposit that you must provide. A store credit card usually carries the highest interest rate but often is easier to get and saves you a percentage on your purchases.
Step 2: Use your credit responsibly.
- Use the card but pay off the balance every month and avoid those interest charges, try not to use more than 30% of your available credit.
- Pay your bills on time. This is most important in establishing good credit, late payments report negatively on your credit report.
- Avoid the minimum payment trap, before you charge it know how you plan to pay it off.
- Be aware of what you owe. Look over your bill and ensure your purchases are reported accurately.
- Don’t spend beyond your means. Impulse shopping and retail therapy are expensive.
Step 3: Develop your credit
A credit card is a good first step to establishing a credit history, in order to improve your credit score you need a history of debt paid on time. This history can come from things like auto loans, mortgages, personal loans and cell phones bills. The key is to have a variety of sources reporting to the credit bureau.
It’s helpful to know what is reported to the credit bureau, how your credit score is determined and even more importantly to check your credit report to confirm its accuracy. A quarter of credit reports contain errors and identify theft is all to common.
Your credit report contains information such as; information on loans you have taken out, balances owing on your credit cards, credit limits, if payments were made on time, active accounts and the reason your accounts were closed. A list of authorized credit grantors who have accessed your file is recorded and a list of companies who have checked your “report card”.
Your credit history is important because lenders, insurers, employers, and others use it to assess how you manage financial responsibilities and it determines your ability to obtain credit. Your credit history also determines the terms of credit granted.
Your credit score is a mathematical formula that translates the data in your credit report into a 3-digit number that lenders use to make decisions. The numbers go from 300 to 900, the higher the number the better. 650 and up is considered good to lenders while 720 to 799 is very good credit.
We have two reporting agencies in Canada, Equifax and TransUnion. You can receive an instant credit report on line from them with your credit score for a small fee, while an online Consumer Disclosure from Equifax is free but doesn’t give you your credit score. TransUnion will provide the same through snail mail. A few lending agencies; Borrowell, Mogo and Ratehub, will provide you with your credit score online for free with the hopes that you will borrow from them. You can also pay for credit monitoring that watches for unusual activity and notifies you when suspicious activity occurs on your account.
The key to credit is understanding how it works and being financially responsible. No matter what situation you find yourself in or at what stage in life you’re at, taking steps to build or re build your credit over time will have a positive impact on your creditworthiness.