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Building or Repairing Your Credit Rating
For a Better Future

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

Quick overview of building or repairing your credit rating

Here you get the advice needed to

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 South Africa or whatever, and still have the ability to meet a short-term emergency.

Otherwise, your fear of lack of funds may make you forego 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 forego 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.

(Be sure to read Dr. Voyageur's Driving safely lesson before doing this. If you're always getting traffic fines, you are not a defensive driver, and may need your expensive 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.

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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 24 percent per year (far, far higher than most people pay), if you pay in full within several invoices, your rate does not come close to 24 percent. You pay interest solely when you do not pay on time. If you pay in full when billed, your interest rate is zero on purchases.

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 prior to travelling.

Moreover, 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 lower incomes.

Moreover, once you establish a good credit history, you move from being a risky cardholder 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 miniscule 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. Use one of the omnipresent American Express printed applications available on any campus, instead of applying online.

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.

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 also apply for one American Express card, one MasterCard and one Visa, but not more than one of each.

Get either a MasterCard or Visa card from a major bank with worldwide operations such as Bank of America, HSBC, and 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.

Be sure that the banks you choose are financially strong. You want your future ability to access credit to be based on your behaviour, not on the financial health of your bank.

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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Helping people with poor credit ratings achieve their goals

People with below average credit ratings in Canada and the U.S. face both good news and bad news.

Having unprecedented access to credit is the good news. Even recent bankruptcy no longer serves as a barrier to credit card use, as long as you did not file applications with false information in the past.

The bad news is that risky borrowers are too often taken advantage of.

Risky borrowers—those who have had problems paying in the past—should expect higher interest rates and fees until they prove their problems paying are really past problems.

Nevertheless, paying a $100 application fee plus an $89 annual fee the first year for a $200 line of credit, plus a high interest rate that goes even higher if payment is delayed by just one day, seems very exorbitant and unfair. Some of these companies, including several well-known ones, want to start you off with 23.9 percent interest rates and other outrages.

On the other hand, there are reputable issuers in the risky market such as Capital One in both Canada and the U.S. that treat you fairly.

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Understanding "risky market" cards

Issuers in the "risky market" offer one of two types of cards or sometimes both.

Some require cash on deposit that matches up to 100 percent of your line of credit; others want just a small percentage. In any case, the maximum credit line is often set at $5,000 for these "secured" cards.

It may seem silly to obtain a card in this way, when you could just keep using the deposit money yourself, but remember that having a card builds your credit rating and makes it much easier to rent cars and guarantee hotel rooms for late arrival. Once you show that you are responsible when using your card, you can ask for your security deposit back.

Other companies give cards without deposits, but the initial credit limit may be smaller than if you made a large security deposit toward a secured card.

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Applying for a card if you have poor credit

In the U.S., various companies "guarantee" to get you a bank credit card or two for a fee regardless of your financial background, but go directly to a reputable major player in the "risky" market like Capital One. Fortune Magazine frequently ranks Capital One one of the 100 best places to work in the United States. It treats its customers fairly, too, with fair interest rates and terms.

Because Capital One issues cards to people with a wide variety of credit backgrounds (in the United States), having a Capital One card does not label you as a poor credit risk.

For "risky applicants," the amount you place in a security savings account determines your credit limit (the amount you can charge), although your credit limit may be three or so times the amount on deposit.

Once you establish or re-establish a good payment record, Capital One no longer requires you to have a security account.

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Thinking about credit counselling and bankruptcy

Readers who cannot control spending—who are frankly mentally unbalanced in this area—are better off struggling along with no credit cards at all. Just cut them into several pieces and send them back by registered mail or at least lock them in a safety deposit box at a bank in order to stop impulse purchases.

Many who have encountered credit problems may need counselling. In the U.S., various credit companies sponsor the free Consumer Credit Counselling Service, which helps work out payment plans with creditors to avoid bankruptcy. Locations of CCCS offices in the U.S. can be found via the National Foundation for Consumer Credit.

Note: The nonprofit offices of these services are subsidized by credit card companies, and you should realize that reducing payments by working with these companies may have at least a short-term negative impact on your credit rating. On the other hand, you probably wouldn't be thinking of using these unless your situation was serious.

In Canada, these types of services are less well developed, but the nonprofit Credit Counselling Service of Toronto can give referrals to what offices exist. Remember, these are nonprofit organizations, whose services are free. If you contact an office that is not free, watch out!

Remember CCCS and its Canadian equivalents, remember are free. Beware of companies that charge to improve your credit rating and to "remove" negative items from your credit reports, as accurate negative information may not be able to be legally removed within set periods.

All too often in Canada and the U.S., people are declaring bankruptcy in situations where a short-term extra part-time job could have resolved the situation.

Think about of how much money you could earn by merely working 20 extra hours a week for one year. Isn't this worth preserving your reputation and not having doors shut on us you the future, instead of going bankrupt owing $8,000?

In spite of what some high pressure bankruptcy lawyers may advertise, bankruptcy carries stigmas that can harm your future. Although a bankruptcy claim will be removed from your credit report after a few years, you will always face the question "Have you ever declared bankruptcy?" on credit applications. If you answer no, you are committing fraud.

Nevertheless, just using credit counselling and working extra hours may not resolve the most extreme debtor situations. In these cases, bankruptcy may be an option, but Dr. Voyageur leaves this momentous decision up to you.

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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.

    This 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. 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 from your bank and credit card companies as soon as possible. You want to nip any identity thief before it becomes an overwhelming problem.

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 on line, 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.

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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, 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.

In any case, 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. This does not look good to auto, mortgage and other lenders.

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 flyer 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.

You can set up automatic minimum payments with many 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. Print out your receipt.

As for passwords, if you need to write them down, never carry them with you or leave them in an insecure place. You can usually rent a small bank safety box for around $25 a year. Rent one, and your passwords and other vital information there.

If you insist on posting your payments—and we think that this is a mistake—take them to the post office or at least to a postal box. Do not leave them on a table in the foyer of your apartment for the letter carrier or in your unlocked mail receptacle.

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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