Spotty credit card payments might not seem like a big deal when you\u2019re first starting out, but that banking boomerang will hit you hard when it comes back around during that first home purchase.<\/p>\n
If you have an icky credit history, or outstanding consumer debt, you\u2019re not alone. For every dollar of disposable income, Canadians owe roughly $1.78 to creditors, according to a recent Angus Reid survey. Canadians are notorious for having high levels of consumer debt, with 59 percent of those in debt having the majority of it on their credit card. Financial ignorance or simple credit confusion can often be to blame for the misuse of credit cards.<\/p>\n
\u201cThere are so many myths out there about credit that really need to be debunked. I hear them all the time when I do workshops,\u201d says Jessica Moorhouse, a financial counselor and award-winning Millennial money blogger, in a statement to Livabl.<\/p>\n
While a 2018 Public Policy Forum report found that money management literacy is doing well among younger generations, it\u2019s important to establish healthy credit habits long before homeownership occurs. A credit history riddled with mistakes, or no credit history at all, can be a major impediment to getting pre-approved for a mortgage loan.<\/p>\n
\u201cIf you don\u2019t have any credit history and you\u2019ve only got a small down payment, you could be declined based on the fact that there is no credit history,\u201d says Laurie Campbell, CEO of Credit Canada Debt Solutions. \u201cThey don\u2019t really know how you\u2019re going to manage that debt.\u201d<\/p>\n
If you\u2019ve got crummy credit history, don\u2019t panic \u2014 you can turn it around. We asked Campbell and Moorhouse for their do\u2019s and don\u2019ts for buyers looking to build a solid credit history in advance of their first home purchase.<\/p>\n
DON\u2019T : Spend to infinity on your Affinity<\/strong><\/p>\n A high credit limit may tempt you into loading up on your card, but you should always exercise restraint.<\/p>\n \u201cNever go over your credit card limit or max it out every month,\u201d says Moorhouse. \u201cTypically, you should only be using 20 to 30 percent of your credit limit. If you tend to spend close to your credit limit every month, consider raising your limit.\u201d<\/p>\n When you become a homeowner, it\u2019s important to keep the same philosophy in mind. If you overspend on a mortgage without considering the additional expenses of sudden repairs, insurance and maintenance, you may find yourself house poor. This vulnerability can make credit cards seem like a viable source of financial relief.<\/p>\n \u201cIf you\u2019re house poor, it\u2019s easy to start using credit cards as a crutch because you can\u2019t meet your obligations,\u201d says Campbell.<\/p>\n To leave some financial wiggle room, Campbell recommends growing as high a down payment as possible and to avoid borrowing the maximum mortgage loan you\u2019ll be approved for from lenders.<\/p>\n DO : Pass on extra plastic<\/strong><\/p>\n If you have multiple credit cards, that means the bank believes you\u2019re a trustworthy borrower, right? Wrong. Instead, you could be sending the wrong message to future lenders.<\/p>\n \u201cHaving too many credit cards may signal to creditors that you have a limited capacity and may not be able to afford to pay any new debts back on time,\u201d says Moorhouse. \u201cIt may also be too tempting to overspend with too many cards on hand.\u201d<\/p>\n Moorhouse recommends sticking with one to three credit cards. Campbell says just one card can be enough to prove you\u2019re savvy with paying back your balances.<\/p>\n \u201cOne good, solid credit card with two or three years of consistent payments \u2014 you\u2019re always on time, there\u2019s no late payments \u2014 it shows that you are in control, that you\u2019re paying as agreed,\u201d she says.<\/p>\n You may also want to pass on a line of credit unless you really need it. Moorhouse often hears that lines of credit are pushed as a \u2018must have\u2019 for financial emergencies, but she sees little benefit in them for improving your credit score.<\/p>\n \u201cA line of credit can serve as a great tool when you need credit and don\u2019t want to pay the high interest rate of a credit card,\u201d she says. \u201cHowever, it\u2019s not necessary to have even though the banks love to tell you otherwise. I\u2019ve never had a line of credit, I\u2019m a homeowner, I\u2019ve got a high credit score.\u201d<\/p>\n DO : Swallow the pill and pay your bill \u2014 all of it<\/strong><\/p>\n If you think paying off last month\u2019s $60 bar tab charge can wait, think again. Moorhouse and Campbell preach paying off your card, in full, every month. If left unmonitored, payment due dates can easily sneak by unnoticed.<\/p>\n \u201cYou might think it\u2019s very innocuous and it doesn\u2019t mean anything, but it absolutely does,\u201d says Campbell. \u201cMake sure you pay it off every single month. Don\u2019t assume that you can miss a payment here or there because your balance is not that big. It doesn\u2019t work that way.\u201d<\/p>\n Doing the opposite and keeping a negative balance\u2014 overpaying on your bill or getting a payment credit after you already paid \u2014 will not undo the wrongs of missed payments or boost your credit score. Instead, Moorhouse says it can cause further damage. She recommends regularly paying off charges.<\/p>\n \u201cThe key things to know is if you\u2019re using credit cards, pay them off in full every month,\u201d she says. \u201cBetter yet, pay off your balance every day or after every purchase so you\u2019re never left with a big bill and no idea what happened.\u201d<\/p>\n DON\u2019T : Run and hide from credit<\/strong><\/p>\n If you have student debt, or are cautious about using credit, it might seem like a good strategy to avoid credit card use altogether. This will only come back to haunt you when future lenders assess your creditworthiness. With no credit history, there\u2019s no proof in your ability to make payments.<\/p>\n \u201cThe only way, or best way, to establish credit, is to borrow and pay back. Just getting a credit card and letting it sit is not going to build your credit rating,\u201d says Campbell. \u201cYou need to use that card and show your payment history, that you\u2019re capable, as agreed, of paying it every month over a period of time.\u201d<\/p>\n A good credit history can reward you with low interest rates. A poor history, or a non-existent one, could result in difficulty being approved for other kinds of credit and at higher interest rates.<\/p>\n \u201cIn lots of those cases, when people really need credit, that\u2019s when they go for those expensive loans or payday loans because they feel like they have no other choice,\u201d says Moorhouse. \u201cAnd that\u2019s definitely not a trap you want to get caught in, because it is very difficult to climb your way out of expensive loans.\u201d<\/p>\n To keep tabs on your credit history, Campbell recommends prospective buyers check their credit report once a year with monitors such as Equifax or Transunion.<\/p>\n DON\u2019T : Ghost on your credit card statement<\/strong><\/p>\n Even with plenty of online tracking resources at their fingertips, Campbell says she encounters clients with no knowledge of their current credit situation.<\/p>\n \u201cIt\u2019s really crazy that some people come in and say they don\u2019t know what\u2019s on their credit card. They don\u2019t open their statements,\u201d she says. \u201cLook online. Be aware of where you\u2019re at. I think it\u2019s imperative to really have a feel for your full financial situation.\u201d<\/p>\n About once a year, Moorhouse recommends running a credit report to verify your score and credit health. Keeping up to date is a surefire way to flag and report any inaccuracies to credit bureaus. Use online banking to regularly monitor incoming charges and payments. This way, you\u2019ll always know what to expect on your next statement.<\/p>\n