Sleepless In Credit

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Credit is one of those things you don’t want to be without. But the credit game is a Catch-22. It would seem that credit and debt are synonymous with each other.  You need a good credit history to snag the best deals on loans, yet it’s very difficult to get credit without a borrowing history. Some of us with credit problems today earned our bad marks at an early age. This is partially our fault and partially the fault of the lending industry.

When I was back in college the credit game was immediately thrust upon me. I was a borrowing idiot, every bank and department store was invading our campuses every month throwing credit cards at any student who could fog a mirror. And those of us students who didn’t know better happily gobbled them up. Some apparently with little thought of what happens when you’re charged 28% on money you can’t immediately repay. You would think if you were a student and had no income, you couldn’t get a credit card or otherwise borrow, period. This, of course, is perfectly logical. What institution would lend money to someone with no means of repaying it? Conversely, what person would borrow money, especially at exorbitant interest rates, that they can’t hope to repay?

The result of this behavior is depressingly predictable. The banks get uncollectible accounts, big write-offs, and fat losses. For students, credit damage that takes weeks to create and years to resolve. When I finished college it took me years to dig myself out of debt. It felt like I would never get from under the weight and stress of creditors. Without the proper education about credit and how to truly manage it in this country, it wasn’t even a fair fight. These days, many kids are apparently raised to believe credit is not only benign; it’s part of growing up. Like learning to drive, it’s seen as something everyone needs to experience at the earliest possible age. It’s a Canadian birthright.

Anyone new to the world of credit or damaged history is probably looking to give their FICO score a boost. So what can we do? Here are four simple moves:

  1. Apply for a secured credit card. Usually, a deposit is used as collateral and typically has a credit limit that’s equivalent to the deposit. Some lenders may refund the deposit and convert the card to an unsecured product after you have shown your ability to handle debt responsibly over an extended period of time. But before applying, inquire about the creditor’s reporting practices. If they do not report to the credit bureaus Equifax and TransUnion your account activity will have no bearing on your credit profile.
  2. Diversify your debt. The types of debt you have sometimes called your “credit mix,” accounts for 10% of your FICO credit scores. Instead of having all revolving debt products, like credit cards. You may want to apply for some sort of installment loan like a car loan or a personal loan because it can help demonstrate your ability to handle credit responsibly over time. Potential creditors may also be interested in your experience with different types of debt.
  3. Don’t fall for the first credit card offer you receive. Don’t waste money by signing up for a credit card with a big annual fee and an exorbitant interest rate. Don’t apply for a lot of cards, because credit inquiries account for 10% of your FICO score. Excessive inquiries drive down your score. Stuck with a shabby piece of plastic? Pay off the balance, but avoid closing the account, because that could also damage your credit score. Then, find a better card.
  4. Keep balances low. The amount you owe accounts for 30% of your FICO score. Think about that before you swipe your card. Many experts recommend that you use no more than 20% of your credit limit.

If you want to have a perfect credit score, don’t use credit to pad your lifestyle or borrow money you don’t have. Try not to borrow to buy things that go down in value such as cars and clothing. Know that this is not an overnight job. Establishing stellar credit takes time and patience. But if you practice responsible credit use, your efforts will be rewarded.


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