If I am being completely honest, my first time was probably a lot like other people’s. I was a little nervous, mostly excited. I thought it proved that I was finally becoming an adult. But I didn’t know what I was doing. Honestly, I probably wasn’t ready. I really wish I had talked about it with someone before. Really understood the implications of my decision. Looking back, it’s easy to see how it inevitably caused damage that affected me for years.
I’m talking about the first time I got a credit card, of course.
It was one of those first-time cards they offer to students, meant to help them build a credit history while teaching them how to manage their credit with low risk. It had a limit of $1000 that was backed by a $1000 security that I paid up front, and an interest rate that I did not understand at all.
I remember the agent talking me through the details. Minimum payments, interest rates, this and that. I remember nodding along, and putting my John Hancock on every page as the information went through my head without really touching my brain. I just remember thinking, “Hey! I have a thousand dollars now!”
I was a young university student, with absolutely zero impulse control, mounting student debt, and a very poor understanding of budgeting. Not surprisingly, my expenses always seemed to outstrip my income. And before long, the card was maxed out and I couldn’t even afford the minimum payments. Or maybe I could, but I didn’t understand that it was so important to make them, and on time.
I ended up feeling like I was drowning in debt, and had no choice but to cancel the card with the security and pay the fees and interest that had accumulated. It decimated my credit score. It was years before another bank would even consider giving me a credit card. It took me even longer to get a good credit rating, and eventually build an excellent one.
As an adult, a good credit rating is one of the most important tools in your arsenal towards buying a home – after all, it’s not just about how much money you make, but whether you can prove to lenders that you’re a responsible borrower.
Ricardo Ardiles is an independent financial advisor. He says having at least a “fair” credit score is crucial towards getting approved for a mortgage. “A credit score under 600 means you’re either having credit problems now, or you’ve had them in the past. Whatever the reason, it shows lenders that you aren’t good at managing your credit. And a mortgage is probably the biggest loan you’ll ever get in your life, so if you can’t prove that you can handle a small loan, banks are going to think you can’t manage a large one.”
If you do have bad or poor credit though, there’s still hope. Ardiles says the most important thing for rebuilding your credit is to pay off all your loans, or at least start making timely payments. The easiest way to build your credit fast, he says, is to get rid of all your credit card debt, and then leverage your credit card to your favour.
“A lot of people have credit card debt, but they only make the minimum payments. Paying the minimum isn’t as bad as not paying at all, but it will bring down your credit score, because it signals the bank that you are spending more than what you can afford,” he says.
On the other hand, if you use your credit card (instead of your debit card) for small purchases and pay off the entire balance every month, your credit score will begin to trend upwards.
“Within six months to a year, you should see some improvement to your credit.”
And this, he says, is key to getting a good mortgage rate. The better your credit score, the better your rate will be. The worse your credit score… Well, it might mean that a bank just won’t lend you money at all.
“In that case, you can go to the secondary lending market. Lending criteria for private lenders aren’t as strict, but they’re going to charge you a lot more interest. I’ve seen clients who were paying 18% interest on their loans.”
Another important factor towards having a good credit score is something you simply cannot rush: time. If you have a long credit history, where you’ve proven over many years that you’re a responsible borrower, it will help you get a better mortgage rate.
“That’s why many parents get their kids credit cards as soon as they are 18. By the time they are ready to buy a house, they have a long history that can really favour them when negotiating rates. Keep in mind though, bad credit stains your record for up to seven years.”
That dark stain is something I’m all too familiar with, but many years later, things are finally looking up.
“If you’re going to get credit, you just need to be careful with it. Bad credit can happen to anyone, young or old. But it’s all about prudent financial management.”