Tuesday, July 7, 2015

The elephant in the room

I just got off the phone regarding a deal for someone who was in their mid twenties, with zero credit history. Never had a credit card or a loan of any kind. Her Mom phoned me because her daughter was having a hard time getting a mortgage approved at another lender. The Mom was trying to co-sign but had another child, whom she had co-signed a car loan for, whose vehicle was repossessed several years ago because her child stopped paying the loan. Because of the repossession, the mother was unable to co-sign the mortgage for her other child. This is not a completely unusual story. I hear variations of this often enough.

My advice to parents is to empower your children with enough knowledge and confidence so they can navigate the financial world on their own, without needing a co-signer for major purchases. If they start building credit with a secured credit card, right at the age of 18, and manage it responsibly, they shouldn't need you to put your credit history at risk by co-signing a loan with them. Capital One offers a great secured card which can be used to build, or re-build credit.

Here is an article that is a couple years old but provides specific, detailed and accurate information on credit! As in the example above, I often come across potential clients who are inquiring on how they can get a mortgage without having any credit history, having never had a credit card or loan of any kind. While there are some provisions for individuals such as these, in general terms mortgage lenders ideally would like to see that a borrower has some credit history. The industry norm is two years on the credit bureau with at least two accounts reporting (FYI-cell phone bills do report). The system works like this; no one really wants to lend you money if you can't show a basic history of managing credit wisely. Would you lend money to someone that had no history of repaying a loan on time, as agreed? I probably would not. In addition to not being deemed as "credit worthy" by potential lenders, if you don't have a credit card in today's world, you are going to have a hard time doing very basic things like booking a trip, renting a car or going to a concert, let alone trying to buy a property.  Cash is no longer king. Access to credit is.

Having good credit will open doors for you and allow you to access better rates and borrowing opportunities. It's no longer a good reason to say "I never needed a credit card so I just didn't get one" or "I just didn't understand the system". The onus is on you, and me, to educate ourselves.  It is so important to foster a great credit history and protect it. Having poor credit will make you an easy target for terribly high interest car loans and credit cards etc. While these companies have their place in society and do help people to re-build their credit history after a bankruptcy, or consumer proposal, they are certainly less than ideal forms of credit.

The article also touches on something that's rarely discussed openly, our overall financial illiteracy and our hesitancy to discuss it openly with friends and family. This is something I don't fully understand, but maybe it's because I work in the financial services industry and recognize how this kind of information can empower people to take control of their financial lives. I am also privy to what's really going on behind the scenes and I can tell you, a lot of folks have no idea how credit works. I am happy to spend time explaining the credit reporting system and discussing ways one can increase their credit score. We can all learn so much from each other so why are we so hesitant to discuss something most people literally know nothing about? Maybe it's fear of embarrassment, or admitting we don't understand something that affects our lives so greatly, or the ego wanting not to feel shame at having made a few bad choices. There is no shame in asking questions and working on improving one's situation. No shame at all! I truly believe that if we all dropped the pretenses of being "perfect" and started discussing our financial lives more openly within our network of friends and family, we would be better off, and more knowledgeable, in the end. Companies that make money from our generally poor understanding of how the system works want us to stay financially illiterate because that's how they make money. That's the truth. Knowledge is power. Use your personal network to arm yourself!

This is such a detailed, in-depth article on credit; I hope it helps to empower you! If you have any questions at all about credit please don't hesitate to drop me a line.

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