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Money management

Building or Repairing Your Credit Rating

Powerful Techniques for Students and Others
In Canada and the U.S.

Quick overview of building or repairing your credit rating

Piggy bnak held in hands, with a few coins shown. Buiding a credit rating

Here you get the advice needed to >

  • Create a financial foundation with credit cards,
  • No credit report or a terrible one? No worries,
  • Decide when students should apply,
  • Pick the right student card,
  • Overcome credit problems,
  • Eliminate credit card debt, and--best of all--
  • Use credit and chequing accounts wisely to protect and build your financial standing.

Everyone leaves this page on the road to a better credit rating.

Creating a safety net and foundation for the future with credit cards

As a student or non student, you should have an insurance policy beyond your savings, and that is having good credit.

You can honeymoon in Hawaii or whatever, and still have the ability to meet a short-term emergency.

Otherwise, your fear of lack of funds may make you forgo many opportunities for worthwhile experiences at the time in life when you have the most flexibility and energy for them. Your fear may make you forgo opportunities that would in the long run alleviate the reasons for your fear.

Furthermore, building good credit rating has become nearly essential for financial success in American and Canadian life, and is becoming as important as an honourable reputation in other parts of the world. You must be able to leverage the funds you have to grow your income.

Credit cards can even help you save on automobile and medical insurance.

Instead of paying high rates for low deductibles on these policies, you can maintain a low or no fee card just for possible emergencies, while enjoying the lower rates of high deductible insurance.

The next sections discuss credit cards in general in Canada and the United States, some of the student card programmes, programmes for non students, and rebuilding credit for people who have had problems in the past. In other words, everyone will leave this lesson with a blueprint to being able to use credit to help achieve goals and build a secure future.

Do not worry if you have a terrible credit history or none at all

1) As long as you live in Canada and have a Social Insurance number or 2) live in the United States and have a Social Security number you are nearly guaranteed to be approved for a credit card.

This works by banks asking for a security deposit and that amount usually becomes you credit limit. Capital One issues these cards in both Canada and the U.S.

Why not merely buy a prepaid card or pay in cash? Because those do not build your credit rating. Credit bureaus want to monitor that you pay on time.

Turbo-charge your your ride to an excellent credit rating by paying in full each month.

Deciding whether to wait to apply after graduation

Now, there are those who say that student credit cards are terrible because of their "outrageous" interest rates and potential for abuse. Moreover, they urge low-income students not to apply for cards when they have little money available to pay bills.

To these people, Dr. Voyageur says rubbish. In most cases, they are giving well meaning but harmful (to your future) advice.

Even at a high interest rate of for example 24 percent per year (far, far higher than most people pay), if you pay in full each month, you need not worry about rates. You pay interest solely when you do not pay on time.

As mentioned, building good credit is almost essential for success in American and Canadian life.

  • Having already started to build a good credit history opens more options when you graduate from school. For instance, you can more easily relocate to a new job and set up a new home.
  • For business travel for your new job, you can easily rent cars and guarantee hotels for late arrival. You won't have to worry about the embarrassment of showing your relative poverty by asking your new employer for a cash advance.
  • Moreover, you may not be able to rent the apartment of your choice without a credit rating.

In addition, anyone who has or develops the willpower to follow the routines outlined elsewhere in these lessons—using time productively, studying, working, saving—is not likely to abuse credit. Those whose lives are in shambles abuse credit, with a few unfortunate exceptions.

Interestingly, the bad debt experience of card issuing companies with students in the United States tracks that of the general population. Students who are issued cards are no more likely to default than anyone else, in spite of their usually much poor cash flow.

Moreover, once you establish a good credit history, you move from being a risky card holder to being a coveted one, and credit card companies fight over you offering low interest rates, no annual fees, etc. Applying earlier in your life speeds this process up.

Finally, if you apply while attending university (and are of normal university age), you are almost assured of being accepted for mainstream cards like American Express. If you wait, you may be faced with security deposits and other hurdles faced by adults trying to establish or re-establish credit and qualify just for fringe cards with minuscule credit limits.

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Obtaining student credit cards in Canada and the U.S.

If you are a full-time university student in Canada and the United States, you have opportunities to

  • obtain credit cards with attractive features such as fair interest,
  • use these cards properly to show you can be trusted for loans to buy cars, etc., and
  • graduate with a solid credit foundation to build success in life.

With this financial cushion, you can more easily start a business, have the money needed to settle into a faraway job, buy a new car or home, etc.—even if you had little or no income as a student.

Students who attend four-year universities in Canada and the U.S., who are of normal university age (e.g., who have not built up a significant credit history prior to attending university), can usually obtain cards without proving employment or any ability to pay. However, you should have at least one chequing or savings account.

In the U.S., one of your cards should be the green one from the American Express Student credit card programme.

At first, this card has to be paid in full each month, the American Express green card offers one of the best beginning credit references you can have. Its Blue card need not be paid each month, but doesn't bring the prestige. The mere fact that you have a green or gold AMEX card turbocharged your credit desirability to others.

True, American Express is not accepted in as many places as MasterCard or Visa, but it is accepted by nearly every major merchant, including all airlines, car rental locations, and chain motels.

Once you graduate and your income income increases, you can convert your American Express student card to the American Express Gold Card, an even better credit reference with various perks like free rental car insurance and special access to seats for hard to get into events.

  • You should apply for just one American Express card, one MasterCard and one Visa, but not more than one of each.
  • You should wait a few months or more between each application. Let the next one see how well you are paying on time, etc. Hold off even longer for the third card.

Get either a MasterCard or Visa card from a major bank with worldwide operations such as Bank of America, HSBC, or the Royal Bank of Canada. You want an international bank because you may be surprised where you end up working and travelling in this increasingly interconnected world.

Again, as a student of normal university age, this is your chance to easily establish a good relationship with a top-quality bank. Go for it.

More information of interest to students follows later.

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Eliminating credit card debt

If you don't have the mental stability to stop spending, in order to get your debt under control, cut up your cards and send them back by registered mail.

If you are not sure, put your cards into a bank safety deposit box.

However, if you are like most of us who can follow a plan,

  • contact each of your credit card companies and ask for a lower interest rate. This works best when your payments are up to date.

    That should significantly reduce the total amount you have to pay off over time. Banks are motivated to grant your request because they do not want you to transfer your balances to other credit card companies.

    With high balances, you are their beloved cash cow. If you have been paying, they want keep you happy.

  • carry one card for true emergencies, which you do not use otherwise.

  • pay the minimum each month on your lower interest cards.

  • pay the largest amount possible on your highest interest card upon receipt of each paycheque.

    Do not wait until you get a credit card bill. Set up getting statements online. Make your payment electronically.

    If you get paid every two weeks, make two payments. Get that cash out of your hands and feel some pain.

  • Once your highest interest card is paid off, go on to the next highest interest one.

  • Be sure to read about effective ways to control your spending and earn more in the Money Management lesson. Like a good general, you want to attack your problem on all fronts.

    The suggestions in Money Management to increase income and reduce spending may become your most powerful techniques to eliminate harmful debt.

You may feel a need to apply for a lower interest card and transfer balances to this card, in order to reduce the total amount you owe over time. However, avoid doing this too often, as applying for too many cards may have already lowered your credit rating.

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Checking your credit reports

Always examine notices and the monthly statements you receive online from your bank and credit card companies as soon as possible. You want to nip any identity thief before it becomes an overwhelming problem—often a nightmare.

Also, you may wish to periodically monitor what is in your credit reports. You may be surprised.

FICO gives you reports from three major U.S. credit bureaus and scores your credit worthiness for a reasonable fee.

Once your report and scores come online, be sure to print your report, as this information does not stay online for more than a month.

Your FICO credit scores combined with your income determine the amount and interest rate of your home mortgages and other loans.

If you live in the U.S, you are legally entitled to free access to your credit report from the three major credit monitoring companies once per year.

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Using credit cards and chequing accounts wisely

Gaining financial respect.

Once the first card is in your purse or wallet, go easy. Apply, if you wish, for a a second card within a few months, but hold off longer before getting a third card.

Students, on the other hand, usually may apply for one each of American Express, MasterCard, and Visa in fairly quick succession, as the usual credit granting criteria do not apply to them. Nevertheless, be very cautious about doing this.

In any case as already mentioned, have no more than one each of the three major cards, American Express, MasterCard, and Visa plus the card of the merchant that you like the most, if you want access to its special sales.

Be sure to use different banks for MasterCard and Visa, so that you are not tied to the credit policies or financial condition of just one bank.

You do not need a purse or wallet filled with multiple MasterCards and Visas and rainbow of cards from various merchants. That does not look good to auto, mortgage and other lenders, unless you are a Bill Gates.

Over time, you may want to upgrade your cards by transferring to companies with better interest rates, no fees, etc., but you should not do this too often. Applying for a card solely to get better terms with a "six month introductory rate" or "30,000 frequent flier miles" may not be worth it, because large lenders look carefully at the number of credit sources that you have used.

Once you have your first card, it is ***absolutely essential*** to pay on time. First impressions and all that.

Many people think that being a day or so late doesn't make a difference. It does. It does a lot.

The American Express, Capital One, and Royal Bank cards mentioned above allow you to pay on the Internet using the card company's own system. Do this for sure—especially while you are establishing your credit worthiness—so that no payment becomes delayed or lost in the mail.

Print out or, if can't at the moment, make a screen shot to print later, confirmation of your payment.

You can set up automatic minimum payments with most credit card companies. Do this.

Never use links to a bank or credit card site that you receive in an email. That email may be taking you to alternative site run by identity thieves. Instead, go directly to the site.

As for passwords, if you need to write them down, never carry them with you or leave them in an insecure place. Rent a small bank safety box and place your passwords and other vital information there.

Lenders may prefer street addresses on your applications, but switch your cards to a more stable post office box address as soon as possible. Changing addresses too often does not look good.

  • Furthermore, do not carry balances from month to month when you first use cards or when you are rebuilding your credit.

    Later on the card companies will love you for your paid over time balances, but for now on-going balances are a danger signal.

  • Going "over limit" is an even more serious danger signal as this shows that you are either not tracking your spending or do not care or worse.

Some "Twelve Step Plans" advocate obtaining a lot of credit cards in order to start a business, and indeed credit cards are becoming a more common way to finance business start ups, albeit a very expensive one.

However, know well that credit cards are a very risky way to finance for various reasons.

Perhaps the key one is that no outsider is monitoring the soundness of your spending plan. Unlike loans from friends or relatives (frequent ways to finance start ups) and other loans, you do not have to defend your ideas. You just spend and spend and spend until credit runs out and you're stuck with numerous credit card bills.

This is especially troubling when children borrow then lose the retirement savings of their parents.

Chequing account maintenance

Let's focus on chequing accounts for a moment.

Technological changes have made it very easy for your lost of stolen cheques to be used by others.

Not only can your account be drained, you may find yourself in a police station trying to prove that you did not commit fraud by writing a series of bad cheques. Interestingly in the U.S., misusing chequing accounts often carries higher penalties than misusing credit cards.

With increasing an number of electronic transfers not requiring your signature on your cheques, it has become very hard to show that you did no wrong.

Therefore, avoid carrying cheques with you. Take along your cheques or deposit slips only when you specifically need them. In most cases, pay by credit card or cash. At home, do not leave them around in easy-to-find places either.

Most bills can be paid electronically. Set up your telephone bills, car insurance payments, and others to be automatically paid by credit card, without your input.

Moreover, in most situations, avoid using the ATM card (also called a bank cheque card or debit card) you are given when you open an account. You may find it hard to track this type of sending, with the danger that you will not have enough funds in your account, but more importantly the use of these cards is more risky than credit cards.

Unlike ATM cards, credit cards in the States have a limit on your liability of fraudulent use.
With ATM cars, you are not in a good position to prove that you did not use the card.

If you do use one to obtain cash, use an ATM machine located at a bank, which most likely will have electronic surveillance. Here, thieves are far less likely to have installed "card readers" in the machines.

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