To young people, credit can be the gateway to the seductive goods their bank accounts can’t afford or an interest-rate trap to be avoided at all costs.
But experts say establishing a solid credit rating is key to building life-long financial stability and not throwing away money on high interest payments.
Later in life when you’re shopping for a new home, the latest sports car or a loan for a new boat for the cottage, your credit score will be what your lender will red circle when reviewing your application.
Credit, when used responsibly, can help improve that score.
Daniel Sarlo, a student at the University of Toronto, got a credit card when he turned 18 on the advice of his father, an economist.
By using the card for his day-to-day purchases and paying the balance fully each month, Sarlo avoids interest charges and increases his ability to borrow more later.
“Realistically, there is no reason to use cash when you could be building up your credit. That’s why I almost never carry any cash around,” he said.
Sarlo says he ensures he never spends more than he can afford to pay off at the end of the month.
“I am using the credit card to my advantage, rather than allowing the credit card company to take advantage of me. I have never had to pay a cent of interest,” he said.
Young people might think big purchases such as a home are a long way off, but building credit is something that should be a priority for all young Canadians, said Farhaneh Haque, director of mortgage advice at TD Canada Trust.
“I remember going to first year of university, there were all these lenders lined up offering students credit cards,” said Haque.
But people young and old need to remember one thing: the key to keeping your debt load low and credit score high is to understand the difference between wants and needs.
And not every young person trying to build a good credit rating goes the route of the credit card.
Cody Dodd graduated from university with a master’s degree in political science and avoids credit cards altogether.
Like many students, he took on debt to pay for his education, which can also be a way to build a solid credit score.
“I don’t see the need to make everyday purchases with credit, even if it doesn’t fiscally affect me negatively,” said Dodd.
He’s used contractual cell phone plans, government loans and student lines of credit to build up his score instead.
“Credit is pretty well unavoidable, it’s an expensive world,” he said.
Your credit score can be provided by companies such as Equifax Canada or TransUnion Canada. Either company will provide a credit report free via snail mail, but if you need it instantaneously, you’ll have to pay online.
Scores range from 300-900, with 86 per cent of Canadians having a score above 650, according to the Financial Consumer Agency of Canada.
“Getting a score of 300 is near impossible,” said Neil Jain, a financial advisor and founder of MoneyLifeSkills.com.
“You’d have to do something crazy like apply for a bunch of new credit in a short span, max it all out, be delinquent for months, file for bankruptcy then do it all over again,” he said.
It may be possible to achieve an 850 plus, although it’s not typical.
A minimum score of 600 is required by the Canada Mortgage and Housing Corp. to insure a mortgage for which the down payment is less than 20 per cent.
When it comes time to consider buying a home, it will have paid off to have made regular checks on a credit score so that work can be done to improve it so it’s not a deal breaker to getting a loan.
“Each lender has a different tolerance for risk,” said Jain.
“They may consider other factors besides the score such as employment stability, residence stability or assets when making a decision on approval and on interest rate.”
Rebuilding bruised credit isn’t easy, but if caught early, can be rectified through a variety of repayment options.
“Check your credit score annually. With advanced notice you can rebuild it in time,” Jain said.
“Usually with eight months to a year of restructured punctual payments, you can elevate your score to ease lenders’ hesitation.”
Haque says couples considering home ownership should regularly check their credit score and work with the results accordingly to avoid surprises from one another come time to apply for a mortgage.