Part two of a report on maintaining your credit while you are in school.
As I mentioned last week, all you need to start establishing good credit is one, low-limit credit card. If your credit history does not allow you to obtain one, inquire about getting a secured card, which requires you to pay the bank a deposit. If you pay your balance for several months, this deposit will be refunded to you. Be very careful where you obtain such a card, though, because many companies that offer these are fraudulent. Try going through a major bank or credit union. Always check a lender with the Better Business Bureau or the RCMP if in doubt.
Once you have a card, use it – every month. Credit that is issued, but unused, lists on your report as R0 (no rating), and does nothing to improve your status. You may think that not using a card shows responsibility, but lenders see things differently. The best way to use your card is to make careful, planned purchases of items you would normally buy with cash. I used my first card to buy groceries and house-wares. You then must pay the entire balance each month – not the minimum payment. If you do this, you will usually not incur any interest. After about 6-8 months, you will have a pretty good rating. After just 6 months I started getting pre-approved credit offers for higher limit cards. It’s nice to have credit on hand just in case, say, my furnace or roof needs replacing.
A good rating on your credit cards is not enough to qualify you for a mortgage or a loan, but it is a start. Using your card regularly and paying either the entire balance, or the minimum payment most times with a larger payment every few months, shows that you are responsible and able to pay on time. Minimum payments are fine once in a while once you are established, but if you do not pay a larger chunk every few months, you will lose your edge.
If you had credit prior to entering school, keep using it and you will maintain your rating and not have to start over when you graduate. Rotate cards if you have to. Try to plan not to need a large loan or to make changes to your mortgage once you leave your fulltime job, because all the rules will change. If you do have to do these things, be prepared to be treated like scum by lenders. You have options (like using an equity based lender), but some lenders can be very nasty when you tell them that you are a student. If you are being refused credit and you are uncertain why, get a copy of your credit reports and read them over carefully. Actually, this is a good thing to do every couple of years in any case.
The Marketplace report What’s Your Credit Rating (http://www.cbc.ca/consumers/consumertips/tips_creditrating.html) advises that “under consumer legislation governed by each province, you are entitled to a copy of all the information a credit agency has on you. But it is not an easy task. The credit bureaus exist mainly to protect businesses and banks from consumers.” Also remember that “there are three credit reporting agencies in Canada: Equifax, Northern Credit Bureaus and Trans Union [addresses for these firms are on the Marketplace site]. But don’t phone them. If you want a copy of your credit report, mail or fax a request with copies of two pieces of identification to the companies. The credit bureau is obligated to review your complaints, however you must supply all the material they ask for on their forms. The forms, which accompany your personal credit report, explain how to file disputes and get corrections made. It can be a drawn out process, but be persistent.”
Different lenders use different credit bureaus. I was having trouble getting approved a few years back, so I requested my Equifax report. The credit information was correct (though I was referenced under three names, 2 of them wrong), but my Trans Union report it showed I was still owing for a debt I’d paid 3 years earlier. Getting it fixed took a bit of work. When I first contacted the creditor, they said it was not their problem. I knew this was not true, so I persevered until I got someone to send Trans Union a letter indicating that my debt was paid in full. Had I not checked my report, this bad debt would have remained on my report for four more years. You also have to know that the bureaus keep records for a different number of years, so when a debt drops off of one, it may still show for a year on another.
Marketplace advises “if the credit bureau won’t correct your file, ask them to mark the file ‘in dispute.’ You may also exercise your right to have a statement (100 words or less) inserted into your credit report to explain your side of the story to potential creditors.” If you legitimately have bad credit, there is little you can do to get it removed. Do not be taken in by firms that claim they can do this for you. Another Marketplace report, titled Repairing Your Credit Rating (http://www.cbc.ca/consumers/market/files/scams/credit/index.html) exposes these firms as fraudulent. According to Sheila McCracken of Equifax Canada, “If somebody has something that’s [sic] a negative nature on their credit file, the only thing that can change that is time. And it takes six years, generally, for a bad debt to come off a file and at that time it’s going to come off regardless of any activity from a credit clinic or anyone else [though you would be wise to check your report at this time].” Some collection agencies will threaten to report your debt for two terms, or 14 years, but this is an illegal claim. No one can do this and you have the right to sue if it occurs. You do not need a credit repair firm to do this for you. Marketplace notes “The U.S. Federal Trade Commission has put credit repair on its list of the top ten consumer scams.”
Bad credit information cannot be removed by you or a credit repair firm, but there are other things you can do. The first is to establish good credit as quickly as possible. It can be difficult to get credit with a bad debt or a bankruptcy on your report, but it is not impossible. Whatever you do, do not give up. The only thing worse than a bankruptcy on your record, is six or seven years of bankruptcy plus no positive credit to show that you have improved your debt management skills. If you are afraid that you might overspend, ensure that you have a low credit limit or get a card like the American Express green [though this card is harder to qualify for] that will not allow you to carry a balance for more than one month. Also, learn more about credit ratings by reading the information on the Marketplace site or any other reputable source of credit information. Many books are available on the subject.
It helps enormously if you know what lenders are looking for in your report, and if you know what credit ratings mean. For example, a debt that goes to collection is listed as an R9 rating, while a bankruptcy is even worse at an R10. Some people assume that these are the same, however, so they will choose bankruptcy to avoid paying settlements. This may be your only option, but it should be weighed carefully. Also, some debts cannot be absolved by bankruptcy, such as student loans. In all cases, it is best to make payment plans with your creditors (you would be surprised how many companies will allow you to do this) or seek advise from a debt counsellor. This may keep your account at an R5 (120 days past due but not yet sent to collection) rating or above, which is bad, but still better than an R9 (collection). In some cases a consolidation loan that will reduce your payments and get you back on track is a good option.
If you are careful, you can build good credit for when you graduate. Do not wait until school is over, or rely on the credit of your spouse. Each person needs their own credit and it takes time to establish. You might get a great job when school is over, but it will not count for much until you have worked for several months, or even a year. Get a head start, and you can start taking advantage of your new buying power as soon as school ends.