Do personal finance writers ever change their minds about the right things to do? For sure. Several years back, I reversed course on young adults having credit cards before they started working.
I now think it’s necessary to have one as soon as the latter high school years, or upon starting university or college. Having a credit card with a modest spending limit helps build financial skills and opens the door to money-saving opportunities from buying online.
There’s one more reason, and it’s the most important. Using a credit card responsibly is the best way to establish a good credit score.
A reader asked a while back for some input on how long it might take a young adult to build a good enough credit score to rent an apartment or borrow from a bank. For answers, I checked in with Julie Kuzmic, Equifax Canada’s senior compliance officer, consumer advocacy. Ms. Kuzmic said that in a case where someone has a single credit card that is paid in full each month, Equifax has seen people build and improve a score within six months.
“Keep in mind that this time frame could be impacted by various factors including credit card balances that are very close to the credit limits, applying for more credit accounts or making a late payment,” she added in an e-mailed response to questions.
Equifax, a big player in packaging credit score data, says on its website that lenders typically regard people with a credit score of 660 and up as good to excellent borrowers. Ms. Kuzmic noted that landlords and lenders may have their own view about what a “good enough” credit score is. They may also consider factors such as job status and income in deciding whether to rent an apartment or offer a loan with a competitive interest rate to someone.
A lot of banks offer no-fee credit cards to students who are 18 or 19 and up, depending on the province. Once a student reaches that age and is earning some income via part-time or summer work, it’s time to start considering a credit card so there’s plenty of time to build a good credit score.
Two rules for credit card rookies: Pay for all purchases immediately online, so there’s never a scramble to pay a monthly bill, and keep the credit limit at $500 or $1,000 to limit the damage caused by misuse.
I used to think that young adults didn’t need credit cards until they started working, and that it was predatory for banks to offer cards to young people. But building a credit score is too important to delay. Lenders, landlords, employers and insurance companies look at credit scores today in assessing people. Start early to make a good impression.
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Rob’s personal finance reading list
Make your phone or laptop last longer
Tips for making the battery on your cellphone, tablet or laptop last longer. Start by not letting your device charge all night.
Cancer and the high cost of hospital parking
All about the “financial toxicity” faced by cancer patients who have to pay for hospital parking in order to get the care they need to survive.
The cost of kids – Year One
A blogger on how much her son Parker’s first year cost. Hint: It’s less than you might think.
Broke before the holidays begin
Thoughts for those who feel financially broken, even before the holiday spending binge hits full stride.
Ask Rob
Q: I am a 36-year-old professional with no debt (no mortgage/home of my own) and have regularly maxxed out my TFSA and RRSP contributions each year. I currently have a large amount of cash sitting in a high interest savings ETF earning about 3 per cent annually after fees. With the new year coming up and new TFSA and RRSP contribution room, I am wondering whether it’s better to max out my contributions immediately (on Jan. 1) and hope for the best or else continue to contribute gradually and incrementally each week throughout the year until I reach my max.
A: The question of whether to make a lump-sum contribution or invest gradually is a classic. Academic studies have shown that the lump sum works better in most cases. However, the gradual approach, known as dollar-cost averaging, has some compensating advantages in that it smooths out your investing experience. You have limited exposure to the risk of buying at a market peak and you ensure that you’ll do some buying at market lows. Think about the lump sum only if you can ride through market turbulence immediately ahead and focus on the long-term results.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
GICs 101: When is a guaranteed investment certificate worth investing in?
The Money-Free Zone
A late-breaking addition to the list of 2022 songs I’ve enjoyed – Love All the Population by Gently Tender. Mellow, then builds to a great crescendo.
From the Twitterverse
Love this thread – people complaining through the ages that “today’s kids are soft and spoiled.” I hear this all the time when I write about the financial challenges faced by young adults.
What I’ve been writing about
- The best and worst provinces to live in for dividend investing
- As a tough year closes, a 10-pack of ideas for spending without regrets on the holidays
- Mortgage-holders, savers and GIC investors, it’s time to change your thinking on interest rates
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF buyer's guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who's best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where’s the happiness? • Who should and shouldn’t worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don’t make this potentially costly assumption about the CPP Survivor’s pension
