The power of obtaining your first credit card is palpable. For many people, their first introduction to the world of credit begins with that first application thrust upon them on their university or college campus by recruiters promising that you can start establishing your independence and burst onto the adult stage with just this little card in your pocket. "Establish your credit rating!" they promise. "Build on it in the future!"
For many university students and young adults, their first credit card is the first anchor around their fiscal necks, mooring them into a lifelong relationship with debt, high interest rates, consolidation woes and even bankruptcy. Credit card companies know that we all tell ourselves, "I should have one in case of an emergency" and they also know that an emergency to an 18-year old can range from throwing a new transmission into the old beater to struggling to upgrade your stereo system every time a new and improved component is unleashed onto the market.
Once you have spent 3 or 4 carefree years doing your best to destroy your credit rating, how can you go about getting back on your fiscal feet before you have to worry about student loans, or god help you, mortgages? The first rule of fixing your credit record is to understand, no matter what some shyster credit counseling service is telling you, is that you cannot change what you have done in the past. It will not go away until up to seven years have passed. The only thing that you can do is to start behaving in fiscally responsible ways from now on in order to put some time and good credit behaviour between you and your irresponsible past.
Your first step towards fiscal responsibility is to obtain your credit report. This credit report will contain detailed records of all of your past credit activities, all credit cards you have and their balances, a list of current loans you have with your name on them, and your past payment record of payments made toward debt (including if they are late or delinquent). Your credit record will also show publicly available information such as if you have filed for bankruptcy, tax liens or monetary judgments made against you, as well as any inquiries into your credit record (for instance by banks or landlords checking your credit history) and who has requested these checks.
You can obtain your credit record form credit reporting agencies (in North America, the big three are Equifax, Experian and Trans Union). Everyone has a right to obtain their credit history for free, and you should check your credit record regularly to make sure that it is accurate and to guard against identity theft. You can apply for your credit record from these agencies online or by calling them.
Once you obtain your credit record, and see where you have gone wrong in the past, you need to set a plan in motion to start cleaning up your future credit record. If your problem is a matter of out-of-control credit card debt and an inability to self-discipline yourself into paying at least your minimum payment on time each month, then you need to get down to basics. The very first thing you are going to have to do is follow some strict guidelines for at least a year. Every time you neglect to pay a payment on your debt on time, you are starting at ground zero again (or below ground zero, as it were).
For one year, make it your goal to make every bill payment you have on time. This is the bare minimum necessary for your credit rating to improve, and if you accomplish it, you will see vast improvement of your credit rating in just one year. One year ago, I had to consolidate 8 years of university debt (including student loans, lines of credit and credit card debt accrued). I could not even get my own loan, but had to have my father co-sign it for me (a bitter pill to swallow at the age of 30 with three degrees under my belt). My banker gave me a stern talking to about my credit rating, and so I plugged away at my debt and bills sheepishly for one year. When I came back to refinance the loan a year later, the loan was not only transferred into my name completely (a bitter sweet victory), but the interest dropped 4.5% from what it would have been the year before had I been allowed to have it in my own name. And all I did was pay my minimum payments on time every month on every bill.
One of the key factors in my timely bill paying was direct withdrawal. This is the best thing that ever happened to every person whose credit rating is poor for reasons that are 50% poverty, and 50% being a numbskull when it comes to paying bills. I put as many of my bills as possible on direct withdrawal from my bank account. The danger here is not having any money in said bank account when the money comes out (the dreaded NSF is as bad, if not worse, for your credit rating than not paying at all, plus they just love to charge you extra for that indiscretion on both ends!). I worked it out so that most of my payments coincided with my work cheque deposits. For the ones that didn't, I allowed my bank to give me a $100 overdraw allowance (the charge for which was less than NSF charges). While admittedly dangerous for someone as fiscally retarded as myself, the overdraw account has saved my credit record hide on more than one occasion. Just remember, it is not credit.
Another killer on the credit record is high credit card balances. If your credit card debt is at 80% of its capacity, what that says is that you live beyond your means (duh, who doesn't?). If you can consolidate those credit card debts into one bank loan, you can improve your credit record by having lower credit card balances and hopefully paying off the debt on time and at a lower interest rate. If you can just whittle away at them, do so, but try to at least transfer them to a lower-interest card (open one of those 15 offers you receive in the mail for a card with low-to-no introductory interest rate and transfer your balance). The fewer loans and debts you have on your record the better,
If you do not have a credit card and cannot get one because of a poor credit record, apply for a secure credit card. You will have to out a deposit down, so in essence, you will not be spending credit, but money you have already put down on the card. While this might seem like a waste of time (i.e. if you had the money, you wouldn't need a credit card"¦), this will get your foot in the credit card door, and it will also establish your ability to make regular payments on said card, thereby establishing your newfound fiscal responsibility.
For those who are further gone down the debt spiral of shame, you can look into credit counselors (but beware of shysters) and explore the possibility of bankruptcy. While it may mean looking at a few more years of bad credit (up to 7, to be exact), you have to look at what exactly it is you have to lose by wiping the slate clean and starting anew.
