A new money rule for young adults: Get a credit card as soon as you start university or college and use it often.
A personal finance writer is saying this – not a bank. Our financial system is evolving in a way that leaves people marginalized if they don’t have a credit history. And the easiest way to generate a credit history is to use a credit card responsibly. In case you need a refresher, that means paying your balance in full each month without fail.
If you apply for any type of credit, your history as a borrower will be used to decide how much you can borrow and at what interest rate. But credit histories are taking on added importance as a way of identifying people. For example, your credit file may be used to verify your identify if you apply to open an investment account.
We have reached an inflection point on credit cards. The potential for hassles in not having a card might just be a bigger negative than the risks of having one and mishandling it.
Here’s a story that illustrates the growing importance of credit histories in our lives. A reader e-mailed recently to vent his frustration in trying to guide some young adult investors through the process of setting up an account at an online brokerage. The broker asked for documents that these young people couldn’t produce – things such as a utility bill with their name and address or a T4 slip for recent income.
The backstory here is that these young people applied to open accounts with a broker that checked their credit file to verify their identity. Because they didn’t have the required history, they were asked for paper documentation.
Qtrade Investor, the firm involved in this story, explained that it’s required under federal anti-money laundering laws to verify the identity of an account applicant. In online and paper applications, this is done most easily by comparing the information on the account application to what’s in the credit file of the applicant.
The credit-monitoring firm Equifax says financial firms complying with anti-money laundering laws may require an applicant’s credit file to have been open for six months or as long as three years. In Qtrade’s case, the credit file is acceptable for verifying identity only if it has been open for at least three years.
If you don’t have a sufficiently long credit history, be prepared for the kind of frustration that prompted this reader to get in touch. Qtrade’s proposed solution right now is that the young investors in this story visit a branch of one of its 200 affiliated credit unions with photo ID.
Credit cards are widely available to college and university students through bank marketing campaigns that almost seem predatory. Even with the modest spending limits on cards given to students, it’s possible to develop a lasting debt problem.
But cash seems to be dying out among young people as a way to pay for things and credit cards are picking up a lot of the slack because they’re convenient, they’re essential in booking travel and they offer perks such as reward points and insurance. I recently used our Gen Y Money Facebook page to ask young adults how essential a credit card is in their lives and got this insightful response:
“Rob, credit cards aren’t credit cards to us Gen Yers – they are ‘convenience cards.’ They facilitate speed of transactions, the prefix ‘credit’ is not relevant to us and is very old school. We are a generation who has been scared away from debt due to costs such as houses and education. I use my credit card strictly to consolidate my purchases, speed up transactions (vs. cash) and facilitate commerce.”
Students may actually be better than the broader population at managing their credit cards. The Canadian Bankers Association says 58 per cent of Canadians pay their credit-card balance in full. In its 2018 Graduating Student Survey, the Canadian University Survey Consortium found that 79 per cent of students with a card paid off their balance in full each month.
The consortium says 93 per cent of graduating students reported having at least one credit card, which shows good sense. Get a card as soon as you start your post-secondary education and use it well. By the time you graduate, you’ll have a credit history that helps you borrow at competitive rates and lets you open an investing account online with zero hassle.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, October 4, 2018