Applying for a credit card is one of the easiest things in the world — some would say too easy. The only thing easier than applying for one is using one.
The problem is that the bulk of these powerful pieces of plastic are in the hands of young Canadians who truly don’t understand the responsibility that goes with them. And personal credit adviser Victor Nichol should know. In his mid-20s, he racked up tens of thousands of dollars on credit cards, lines of credit and student loans, and is still paying for it today.
“I was young and stupid,” Nichol says. “It’s so easy to walk in somewhere, throw that MasterCard on the counter and say, ‘I’ll take it!’ Then you get the statement at the end of the month and think, ‘What the heck did I buy that jacked it up this high?'”
Nichol applied for his credit card while he was at university. A lot of lending institutes make it very easy for students to get credit. The idea is to help them get established for when they get out of school. The problem is those companies don’t give lessons on how to use such credit.
“It’s awesome when you get that card in the mail or when the bank says they’ll extend you a huge line of credit,” Nichol says. “Unfortunately, they don’t tell young people how to use them properly so they don’t get themselves into trouble.”
Nichol used his experience as a life stepping-stone and now helps others, especially teenagers and young adults, understand and control their credit. Here are a few of the biggest mistakes people make:
1. Too many credit cards. “This has to be the biggest mistake people make,” Nichol says. “Firing out applications to anyone offering a card just doesn’t look good because lenders will wonder why you need so much revolving credit.” In addition, it provides too much temptation to use one credit card when another is maxed out.
2. Exceeding limits. People need to pay attention to their credit card limits and try not to get close to them unless they can pay it off fairly soon. Exceeding your credit card limits gives the impression that you don’t understand your own limits. It also tells lenders that you can’t be trusted with what you’ve already been given. This can result in restrictions on your credit card, or even cancellation of it.
3. Not paying at least the minimum payment. Even though it doesn’t put much of a dent in a huge balance, paying the minimum shows some responsibility. As Nichol stated, “If you can’t pay at least that much, you shouldn’t be using it.”
4. Switching credit card companies for better deals. A lot of credit card companies offer free balance transfers for a great initial rate. Nichol says, “Doing this once or even twice to help get out of debt is fine. But if you make a habit of it, lenders will wonder what you’re hiding and reject the application. And it sure doesn’t look good having all of those openings and closings of accounts on your credit history.”
5. Using credit cards to pay everyday bills. A lot of people, especially in tough economic times, resort to credit cards to pay bills. The hard truth is that if one doesn’t have a job to pay the regular bills, racking up credit cards — with the addition of interest — shouldn’t be an option. It only makes things worse.
6. Drawing cash. As Nichol found out, it’s very easy to withdraw cash on credit cards when the bank account is empty. And there’s nothing wrong with that, as long as you remember to pay the card back. “The big mistake here is not realizing that most card companies charge higher interest when you draw money on the card than on the purchases. If you borrow the cash, pay it back, plain and simple.”
7. Not keeping track of credit card statements. A lot of young people don’t check their credit card statements often enough until someone tells them, “Sorry, your card was declined.” A lot of places have also gone paperless, making it even easier to forget to make those credit card payments. “Stay on top of it, even if it’s not environmentally friendly to get the statements mailed to you,” Nichol says.
8. Allowing others to use your personal credit cards. “This had to be one of the worst mistakes, and the dumbest, I’ve seen people make,” Nichol says. “Never ever let someone else use your card or buy for others with your card unless you know for certain they’ll be there at bill time.”
9. Ignoring fine print in the initial information package. The most important part of a credit card package is the tiny, folded piece of paper with the client expectations on it. “I encourage all my clients to read it, or at the very least explain it to them in layman’s terms,” Nichol says. “If you understand what’s expected of you, and how the interest rates work, there’s a better chance you’ll use it more wisely.”
10. Impulsive buying. This doesn’t just apply to young people. One of the main reasons for debt pile-up is making a major purchase, or a bunch of little ones, impulsively, without looking around or thinking about it. “I always tell clients to give it a few days — think about it, mull over it, shop around for better deals,” Nichol says. “If they still feel strongly about buying that item after that, get it. Just be sure you have the money to pay off the purchase.”
Aside from these vital errors, another thing people don’t do enough of is watch and understand their credit history. And Nichol can’t emphasize the importance of doing this strongly enough.
“Bad things stay on your credit for a very long time, sometimes up to six years,” he says. “I once applied for a job at a bank and was turned down because my bad credit made me look untrusting to a financial institute. And that was a job I’d applied for four years after getting out of debt. If that doesn’t open people’s eyes to what can happen to them and how long it can affect them, I don’t know what would.”
