December 15, 2014
Saskatoon Mortgage Broker: Tammy Wandzura : Tips for Teens and their parents-How to build your Credit from the Ground up!
For many years I have been advocating to start a program, possibly even in high-school Grade 12; where Teens and their parents could learn the “Meat and Potatoes” of building healthy credit from the GROUND UP!
Banks require good credit for such things as credit cards, car loans & mortgages
The problem is that there has never been a “class” to teach any of us how to build and care for our credit, or to outline what EXACTLY the bank will be looking for when you are ready to apply for a loan.
Many personal banking officers can advise you on some basic tips, but depending on how their internal system works & their experience; may not be educated or able to see a true reading of your credit.
Many banks internal systems will pull your credit and internally Grade you into a A, B, C or D category that fits within their own lending policies and guidelines.
So you may be told you are an “A” Or a “D” but you would have no idea on what that really means.
Personally having children in both Grade 12 Highschool and University, it has come to my attention regularly – that these kids are not being given some basic ABC’s of what they are really going to need to know.
As parents we have never taken a course or been “taught” what to teach our kids regarding their credit.
We learn through what our parents have taught us, through past experience, mistakes and oversights.
I read credit every day.
I know how to build your credit, repair your credit and how to create the ultimate flexibility any consumer will need to start their building blocks of life.
I will provide numerous tips on how to build credit, what the banks are looking for and some general tips to pass along to your Teens that may save them some bad experiences that I have seen first hand
I always say….our biggest lessons learned always seem to be financial.
Unlike other mistakes we make as we grow up; Financial oversights can take a long time to dig out of…and is the big reason that we see many young people struggling financially.
Step 1:Get a credit card @ 18 years old
Every lender requires that applicants have 2 pieces of well paid (active) credit for 2 years
Credit cards are the best way to accomplish this & get started
Car loans are also good **BUT once they are paid to zero they are no longer “active”
Also, I always hesitate to recommend a “NEW” car loan to young people.
Life can change by the moment when you are young and a car payment can tie you down very quickly.
New cars generally lose value the moment you drive them off the lot and it can be virtually impossible to sell the car to pay the loan or lease off if you want to travel for a year, go to school or something that doesn’t allow you to carry a car payment
I know as parents we want to avoid getting our kids into Credit card debt for as long as we can
If we teach our kids how to be responsible with credit cards it won’t matter if they are 18 or 25 when they apply for their first card
If you have a strong relationship with your bank – ask them about the options that are available for your Young Adult.
Are they working full time?
Are they a student?
There are likely options available
OR start with a Secure $500.00 Credit card
Companies such as Capital one have a secure card; where you send them $500.00 and they send back a credit card with a $500.00 Limit
This will generate a credit score for your Teen.
After 12 months of managing this card well, they can apply for a second card.
By then some of the major banks should be able to provide a small credit card limit
The goal is to have 2 “real” credit cards and cancelling the Secure card once you have attained the 2 pieces
2)Manage the credit well
This piece of advice is good for anyone that carries any credit
Credit card payments must be made ever 30 days regardless of the balance or if you have made more than your minimum payment the previous month
The rule of thumb is that you will owe 3% of the balance as your minimum payment
Ideally – teaching our children to use credit cards as a convenience but never to hold a balance is the very best option.
If there is a balance held on the card a minimum payment must be made every 30 days
Another very very important rule is to keep your balance NO HIGHER than 50-70% of the Limit.
As soon as the balance starts creeping up to the limit it can drag your score down as fast as missing payments.
3)Do not apply for credit too often!
When you apply for credit too often it looks like you are “credit seeking” and can negatively affect your credit score
Only apply for credit when absolutely needed!
Applying for credit should be done as a well laid out plan for what you may need or want in the future.
Be cautious when shopping for vehicles at dealerships
Some dealerships are only concerned about their sale (not your credit) and once they have a credit app will fish your credit out to many lenders to get a loan approved.
Every single time a lender checks your credit your score goes down
I have clients that have had amazing credit- and after going car shopping their score is below minimum approval guidelines for a mortgage
Not every dealership operates this way.
But it is your right to advise them you do not want your credit checked more than once without your permission.
4)Buy the house and then the vehicle!
The single biggest mistake I see is young people that have significant car, truck, ski-doo, quad or boat payments BUT do not own a home.
The payments that you currently have will be applied against your Gross income
That means if you have a $1000.00 Truck payment, that is $1000.00 less that can be approved towards your mortgage approval/monthly payment.
With many people able to earn larger incomes at a younger age (working up North or on the Rigs) its important to remember HOME then New VEHICLE.
Vehicle loans through dealerships do not qualify the same as loans and mortgages at the bank.
Once you own a home you will be able to get the new vehicle.
5)Utilities – Cell Phone Bills
Generally speaking things like rent, cell phone bills, mortgage payments and utility payments do NOT show up as well paid credit on the credit bureau
These types of things do not help build your Credit Score on the credit bureau
If you do not pay these types of things on time (also includes: parking tickets, speeding tickets, Cable TV etc) you will have an “unpaid collection” registered on the credit bureau
This will not go away until it is paid 100%
It will also negatively affect your credit score.
Cell phone companies have JUST started reporting onto the credit bureau, this will not count towards your 2 pieces of well paid credit for 2 years – but it is extremely important that you pay the bill on time each and every month.
6)Start saving your Downpayment today!
The minimum required downpayment is 5%
That means if you want to buy a $300,000.00 Home or Condo your downpayment requirement will be $15,000.00
If your Teen is living at home, going to University and working Part time or more??
They likely have more dispensable income than you do.
If they were to save $312.50month for 4 years while they are living at home going to school they will save enough for a 5% downpayment on their first home!
Once they have graduated and have landed a job they could buy a home and their mortgage payment will be less than any current rent payment.
AND they could rent out rooms or a basement suite to their friends to lower their monthly costs and build equity from Day 1.
Is it a good idea for a Young person to “tie themselves down and buy a home?”
The answer is YES!
A home will always generally increase in value in a healthy economy.
The home will build equity as payments are made monthly
If for some reason your young person has a change in life course the home could be sold or if they are going to be traveling for a year or doing something untraditional; and¬† if they have a support system in the local area, the home could be rented out to tenants so that the equity could continue to grow.
7)Other TIPS that every Teen needs to know
Do not sign a lease unless you know you will be staying put for that amount of time
Leases are hard to get out of and when you are young plans can change by the day!
Do not sign a lease or rental agreement with a friend
Friendships can be put to a test when you are legally obligated to one another through a lease or month to month agreement
When you leave a damage deposit cheque for a month to month rental- understand that your written cheque obligates you to that rental, just as a lease would
Whomever has written that cheque is ultimately legally responsible.
I will provide a direct example (based on true events):
3 friends decide to rent a condo together
Only one of the friends has a “chequing account” (Friend 1)
The 2 friends give Friend 1 cash to make up their portion of the damage deposit
Friend 1 writes the cheque to hold the unit
There is no lease signed – but an understanding that its a month to month rental, and 30 days notice to vacate would be required
Friends 2 & 3 change their minds last minute and decide not to proceed
Friend 1 is now legally obligated to this rental.
If they cancel the cheque and cancel the agreement they can beheld legally responsible for at least 2 months or more rent and any legal fees or costs the landlord incurred.
If they move in they might not have enough monthly income on their own to make the payments
If Friend 1 does not have the support or knowledge to know what steps to take at this point – worse case scenario the landlord could take them to small claims court and if Friend 1 loses – this will show up as a Judgement on their credit bureau and will affect them to have the ability to get a credit card or buy a home for up to 7 years.
This type of things happens all of the time.
This is not an isolated incident
Teaching our kids to be responsible and independent with their credit will lead them to financial freedom.
In a society where we give our children more than we ever had and in some cases more than they will ever need, lets also teach them the roles of responsibility with their credit.
With home prices increasing year over year, many parents simply cannot assist each child in cosigning to purchase a home.
Lets teach them from the GROUND UP!
Why do you want Healthy credit?
To give you and your Teens the ultimate financial flexibility in the future to do what you want to do when you want to do it.
**Interested in other TIPS directly related to Building your Credit from the GROUND UP?
Or Teaching your Teen ways to care for their credit?
TIPS on how to pay your Mortgage off faster? Or manage your own credit score?
Please email me and let me know!
Depending on the interest will depending on the level of course or info that I can look into providing in the future
~~ All the very best in 2015!
Tammy Wandzura-Saskatoon Mortgage Broker