This article was co-authored with Bear and the Bull.
Congratulations! You understand the difference between a credit union and a traditional bank, and what differentiates a checking account from a savings account. You’re on your way setting yourself up for a strong financial foundation in your new home.
However, there’s more to building wealth in Canada and the US than simply saving money. In order to succeed, you’re going to become a master of credit.
You may or may not have heard lots of conflicting information about credit cards. While the adage “cash is king” is true for many reasons, let’s just say, that credit runs the entire chessboard. Before you march to open your first credit card thought, read this primer that we’ve created to educate you on credit scores and credit cards.
A credit card used correctly can be a powerful tool, as long as you commit to always paying off your balance in full. Make sure you understand these basics, and you’ll be well on your way to financial success.
What is a credit score?
Your credit score is as important as your cholesterol or blood pressure. It’s an indication of your creditworthiness, or in plain English - how likely you are to pay back your loans. In the eyes of financial institutions, it’s basically a ranking of your trustworthiness.
Why is this important?
If your credit score is a reflection of your trustworthiness to banks and credit cards, it determines the kind of access they are willing to give you. The higher your credit score, the more access you have to things like:
Attractive rates on loans - allowing you to obtain favorable rates on everything from student loans to mortgages
High quality credit cards with great perks
Housing - landlords can pull up your credit score when deciding whether to rent an apartment to you
Your credit score is the key to building wealth.
How do I build credit?
1. With a credit card - no matter which option you use, pay your balance in full at the end of the month!
Secured credit card: you provide a cash deposit
Student credit card
Store credit card
2. With help from your parents - again, make sure to pay your balance in full!
Get your parents to sign you up as an authorized user
Co-signer: be careful! Witha co-signer, you and the co-signer are responsible for the balance, so make sure it’s someone that is financially rock solid and stable
3. With loans
Student loans: this is such a standard entry point for so many people. Since your credit score is increases the longer your history, I know friends who keep a small balance on their student loans to make sure their credit history is in tact!
Mortgage: this is also an alternative, although quite tricky, since most lenders would be unwilling to lend at attractive rates to someone with no credit.
What should I look for in a credit card?
A good starter card should have the following features:
No annual fees
Some type of perks (cash back, points towards travel, etc)
Strong customer service: mistakes happen, and if you want to dispute a fraudulent charge, you want to make sure that your credit card company will be on your side
Best ones: Discover, Capital One...