Credit Woes

Part one of two

Credit: You need it, but it can be difficult to get, especially if you have stopped working or are only working part time while you attend school. There was a time when you could manage quite well without a good credit rating. In fact, it used to be a mark of pride to always pay cash and never apply for credit; even today this is still the best way to manage your finances.

These days, bad credit or no credit can really hamper your life. If you ever travel, you will find that it is nearly impossible to rent a car or reserve plane tickets or hotel rooms without a credit card. It can also be difficult to do something as simple as getting a membership at a video rental store or a health club.

Bad credit obviously affects your ability to get a mortgage or lease a car, but it may also affect you in ways you are not aware of. According to a Market Place article, What’s Your Credit Rating (http://www.cbc.ca/consumers/consumertips/tips_creditrating.html), a bad rating can also lower your chances of getting a lease on an apartment, or a new job.

This can be an especially tough burden on students, who have limited income and may work short-term jobs between semesters. Part time employment may not qualify you for loans or lines of credit. You may have started out with very good credit, but ironically your rating slips very quickly if you are responsible and do not use your cards for an extended period of time. Good credit gained from paying off a loan falls off your record in a few years.

Your student status may also make it difficult to capitalize on credit gained prior to returning to school. I learned this first-hand this Christmas. Three years ago we planned to purchase a new vehicle prior to beginning school because we wanted one that would not break down while we were on a limited income. Unfortunately, the Student’s Finance Board limits the value of the vehicle that you may own, and this value does not increase even if you have one car for two people. So, we had to buy a used car which turned out to be a lemon (and of course we had no warranty, because it was used) that over the past two years has cost us far more than an economical lease payment on a new vehicle would have. Looking at the experiences of many of my friends and family, I am not the only one who has found the cost of older vehicle to be astronomical.

I once questioned Student’s Finance Board about their guidelines and was told that they are in place to keep student debt low. It is also for this reason that students are allowed to own homes and are not penalized for having equity. The Finance board has determined that mortgage payments can be lower and more stable than rent, and that many students who do run into financial trouble, do so because they cannot find affordable housing. I think it is about time the board take a better look at their vehicle policy, because our car (and again, we only have one for the two of us – hardly an extravagance) has been our biggest money drain so far, and a low lease between the two of us would have been much more manageable. Or, we could have bought a car outright by placing it on our mortgage and not worried about car payments at all, which would have been great while in school. I certainly understand that the SFB expects that if you have a very expensive car you would sell it for tuition money, but we should not be penalized for driving a low-priced newer vehicle.

The guidelines are strict, however, and we adhered to them while we were funded. This Christmas, though, the money-sucking Le Baron broke down again, and rather than face yet another repair bill, we decided we would get an economical new car. As students who are close to graduating, we are even eligible for a $1000 discount on a Chevrolet. We ran into problems right away though. First, we could not get lease financing because we work part-time and our job history while in school has consisted mostly of short-term employment. This still should not have been a problem, because we bought our house before entering school, and have enough equity to easily cover the car. Prior to starting school, we easily qualified for a line of credit on our mortgage, but when I called this week, I found out that we cannot touch our equity because of our uneven employment history. Our payment history is excellent, but we have to re-qualify each time we want to make any changes to our mortgage. This is what I mean when I say that your credit history is short-lived. Qualifying once is not enough, because you must continue to qualify if you want to make the most of your mortgage or lines of credit. Our solution has been to switch our home to an equity based lender, but in the process we have had to forfeit a larger chunk of our equity.

So how do you get credit when you are a student or how do you maintain credit that you acquired before going back to school? There are some benefits from your student status where credit is concerned. Most banks offer student credit cards, which allow you to qualify with very minimal income. I got one when I first started school though I had little credit history beforehand. If one institution turns you down, try another. The bank that holds my mortgage denied me credit, but another bank I had never dealt with approved me. Be careful of making too many applications, however, because these inquiries will show up on your credit report and do not look good all grouped together. Keep trying though, all you need is one, low-limit card.

Next week I explore ways to improve your credit rating and take charge of what’s on your credit report.

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