Tag: credit

What’s your Credit Score?
What’s your credit score? Do you know? How do you check? What does it mean? How do you establish one? If you don’t know the answer to any of these questions, you’re not alone. Up until two years ago I was not even remotely concerned about the state of my credit. Since then I’ve learned that my credit will soon be integral to the way I live and if you’re the average student you should probably know at least a little bit about how it works.
Let’s assume that right now you’re starting from the bottom. Your first goal should be understanding what credit is. Credit is “money” that is loaned to you based on the understanding that it will be paid back with a fee, known commonly as interest, added to the original sum as a service fee for advancing you this “money.” What is important to remember is that credit is not really money. It isn’t yours and if you use it and fail to pay back the amount you used, you’ll be charged interest on the full amount you’ve used. It isn’t as simple as borrowing money and paying it back. For example, if you use one hundred dollars of credit and your lender charges you interest at a rate of one percent, by the end of the month if you haven’t paid your bill you’ll be charged one dollar. Interest rates and schedules can vary, but rates are usually far worse than one percent, especially for young people like us. Because these rates are also compounding, if you apply for a large amount of credit you can get yourself into trouble quite rapidly. This is why basic financial literacy is important.
Now that you understand what credit is, we can move on to a common example, the credit card. A credit card is something that you are probably familiar with: just like a debit card, but with a limit of a certain amount. These cards often belong to a financial institution like BMO or Scotiabank, with the payments made on it administered by companies like VISA or Mastercard. You have to be eighteen to apply for one, and most banks provide a number of “products” or types of cards from which you can choose.
Let’s assume that in this case you’re applying for a new credit card and you’ve never taken a loan from a bank before. When you apply for credit, whether it’s a line of credit, a mortgage, or in this case a credit card, your bank will check your credit report to judge whether or not it’s a good idea for them to allow you to borrow the amount you requested. But, because you have never been issued credit before the bank won’t have a credit report for you. In this case you’ll be asked to provide something the bank calls “proof of income.” Basically, they want to know that you have money with which to pay them back should they allow you to borrow. A pay stub from your last employer is usually sufficient proof of income.
Now that you have a credit card, you’ll be able to begin establishing your credit. This will come with time after you have been issued your credit card. Having “established credit” is essentially the act of using credit that credit monitors can generate a report on. This credit report is a record of your financial history, but more specifically it’s a history of your “credit obligations.” According to credit monitoring agency TransUnion, the things that appear on your credit report include, name, birthdate, social insurance number, and most importantly your history of payments to credit grantors like banks. There are other credit grantors, but for now they don’t matter. Now that you have a credit report based on which lenders can assess your trustworthiness, you can begin to worry about your credit score.
You can imagine your credit report as your transcript, and your credit score as your cumulative grade point average. Your CGPA is a summary of the information contained within your transcript in the same way that your credit score is a summary of the information contained within your credit report. There are a few significant similarities between a credit score and a CGPA. For instance, the higher your number the better. The credit score equivalent of a 4.0 is somewhere in the neighbourhood of 875-900, with 900 being the best possible score. As a matter of fact, anything higher than an 800 is considered perfect. On the low end of things, a 2.0 is basically in the 743-789 range. Again, just like your CGPA, the mistakes that you make will change your score years in the future. TransUnion has an incredibly helpful webpage that explains some of the things that will appear on your report which can make your credit score fluctuate.
Things that can make your credit score go down include basic bad credit behaviour. Not paying your bill on time, not making your minimum payments, and bankruptcies can all decrease your score. Bad offences can stay on your report for as long as seven years in some provinces. Typically, it’s your payment history that affects your score the most. If you fail to make your minimum payment a few times, you can expect your score to drop. How much it drops or increases for any one “credit event” depends on how bad the event is. Credit inquiries can also make your score decrease. For example, if you apply for a new credit card and the bank you apply with looks into your credit, your score may decrease. This doesn’t mean you shouldn’t check your own credit score. My bank offers an analysis of my score to me online and it doesn’t count as an inquiry. Checking your credit score a minimum of once a year is key.
Some credit events are positive and may increase or preserve your score. Paying your bill on time is key, but you should also make sure that you’re not using too much of your credit. Usually holding a balance of 35 percent of your maximum limit is comfortable. If you’ve got a limit of $1000 keep your charges below $350. Using your card frequently is also good, but mostly for things that you can easily pay back. Spotify, Netflix, or any other low-cost monthly subscription are good things to charge to your card. Paying off your oldest card and cancelling it can also help your credit.
If you’re not careful with credit, things can go poorly. My personal journey with credit has been something of a nightmare. I was about as financially responsible at 18 as one could expect. I walked into my bank a week after my eighteenth birthday and applied for a low limit no fee credit card. After getting approved I ran up some charges on my card. My lack of financial literacy at the time coupled with disingenuous banking practices resulted in a total credit disaster. My particular card was apparently designed specifically for students. With a low interest rate, it seemed perfect. After managing to make minimum payments for a few months on what was less than $500 of charges I was in a pretty decent spot. But that low interest rate that I was in love with was what is commonly referred to as a “teaser” rate: my interest rate was only so low for a limited time, and after three months the rate increased. Obviously, I was not aware of this. On month four of my brand-new credit card I received my online statement and nearly shit myself. Not only did I have quite a sum accrued in interest, but it put my card over the limit which caused an over-limit charge of $29. It was quite an expensive lesson to learn but following this I became quite interested in how lending operated. Improving your credit score requires a lot of time and patience. Financial literacy is essential, and as young adults we should do our best to learn the ins and outs of the system to come out with a positive result. You might have a multitude of questions regarding personal finance, but you would be best served to start with a good credit score.
Christopher Vanderburgh is a fifth-year (Honours) Politics student and the Features Editor of The Athenaeum
September 29, 2018
Good Credit, Bad Credit, No Credit: Things Students Should Know
For many undergraduate students, attending university is one of the first times living away from home. Some of the privileges of being an independent adult are a lack of bedtimes, doubling your helping of dessert… and paying your own bills with that shiny new credit card of yours. But what is credit? Why is it important? Surely credit scores aren’t that much of a concern when you’re only a young student. Right?
Credit, in it’s essence, is imaginary money. You never get to physically touch those dollars. They exist only as numbers associated to a plastic card. However, this does not mean that it is free. It can be seen as a very small loan from your bank given to you on good will, and you can access these funds when necessary through the use of a credit card. Some banks allow credit values from a couple of hundred dollars to a couple of thousand dollars. When you’re a student, though, it’s more likely that you’ll be approved for a credit card in the hundreds range. Whatever you choose to spend, you have to pay back to the bank. This is obviously a pretty sweet deal because you can now make immediate purchases and pay the bank back at a future time. So where is the downside? The downside is that if you fail to pay the banks back, that’s when the interest hits you. And depending on how prepared you are, that interest can hit you pretty hard and begin to affect your credit score. I’ll get to the issue of credit score a little later.
Let’s say that you have a credit card limit of $100 (let’s use nice small numbers for example’s sake). You’ve spent $100 on a week’s worth of groceries, and for some reason you cannot pay the bank back $100 on time. Your credit card has an interest rate of 10%. This means you will owe an additional $10 on top of what you already owe on your next credit card bill. Now, I know that $10 may seem like a measly sum, but this is money that you could have avoided paying entirely. Not to mention, these numbers aren’t entirely realistic. If you’ve got a credit card with a limit that is significantly higher $100, this will obviously reflect in what you’ll owe in interest if you fail to pay. If you fail to pay the $110 that you owe next month, an addition 10% will be added. You now owe the bank $121 and so on and so forth. If you repeatedly spend up to your limit and fail to make minimum payments, your credit score will start to suffer.
You’re probably thinking, “I’ll just avoid all of this hassle and not get a credit card. This way I’ll never miss a payment, pay interest, and avoid lowering my credit score. I’ll just pay everything in cash.” In some ways, I would agree that this is clever. However, credit is important for several reasons. Think of establishing credit as a stepping stone towards bigger and better things. If you never miss a payment and use your credit for a long time, this establishes a “good” credit score with the bank. On the other hand, if you regularly miss payments, this establishes a “bad” credit score with the bank. But why does this matter? Allow me to present to you a scenario:
You have two friends, Bob and Sam. Both Bob and Sam regularly ask to borrow your bike to get in an out of town. Bob is incredibly responsible with borrowing your bike. He uses it when he needs to run errands and brings it back to you in pristine condition. Sam, on the other hand, borrows your bike whenever he so pleases and often forgets where he puts it, and when it does come back to you it’s missing parts. One day, both Bob and Sam ask to borrow your shiny new car. Who would you rather say yes to? Would you say yes to your friend with the good track record, or the bad one?
In a similar way, a credit score is the bank’s “track record.” You may be a student now and owning your own car, business, or home isn’t that important to you at the moment. One day, however, you just might go into the bank to ask for a car loan or mortgage. Depending on whether or not you have a good credit score will determine either your loan’s approval or denial. But let’s go back to the scenario where you don’t bother getting and using a credit card out of concern that you may lower your credit score. Having no credit established is like having no track record. If your third friend Will asks you, completely out of the blue, to borrow your car, how are you supposed to determine if he is responsible enough or not? A reasonable person would feel incredibly iffy about saying yes. Having no credit can be just as bad as bad credit.
The process of owning a credit card for the first can be incredibly intimidating for students because they may not understand entirely its implications. This article so far has discussed interest, credit scores, and what not to do. But what are some of the things that students can do to help improve and maintain good credit?
1. Think of a credit card as a two-step debit card. Try to use your credit card only when you know you have money in your savings or chequing account to immediately pay that sum back. This way, you’re using your credit and creating a track record, as well as paying back what you owe to avoid interest build up.
2. Pick a credit card that’s right for you. Not all credit cards are the same. Some have higher or lower interests, higher or lower credit limits, different annual fees, different rewards and so on. Don’t be afraid to go speak with one of your bank advisors to help determine which card best suits your needs.
3. Check your credit card balance regularly. This will help you to determine how much credit you have left to avoid overspending. Exceeding credit limits often comes with hefty penalty fees which is included when interest is charged after missed payments.
4. Do your best to avoid “big” purchases. Emergency spending is a completely different case. Things happen, and having a credit card there to help you out of a tough spot is always a great thing. Spending money on a new television or expensive pair of boots is probably not a priority.
5. Do not co-sign for your friends (even if they are your BFF). Co-signing for your family is a different scenario. The reason why you shouldn’t co-sign for friends is because it’s difficult to determine if they are a Bob, Sam, or Will with concern to their spending habits. If they end up being a Sam and have substantial amounts of money owing, as co-signor you may be held responsible for paying off that debt if your friend fails to do so after a certain period of time.
November 18, 2016

Tag: credit

What’s your Credit Score?

Good Credit, Bad Credit, No Credit: Things Students Should Know