Friday, January 23, 2009

Cleaning up your credit Part V

Wrapping up a week of cleaning-up your credit, I'd like to end this posting theme with some less obvious thoughts and questions I receive on the subject.

Q: If I have a credit card with my spouse, I'm building credit, right?

A: Likely not. If your spouse has a credit card and has ordered a supplementary card on their account, no approval for said card is required on your part. Your spouse would be responsible for your spending, paying back the debt and your purchasing would still form part of their overall account limits, credit standing, etc. The basic rule is, if you didn't have to "apply" for the credit, then you're not building credit in your name. Consider if your spouse were to, God forbid, pass away or separate from you, this credit extension and card would disappear as well.

Q: Then how do I build credit?

A: Often, no credit can be as difficult to deal with as a poor credit standing. Using the above question as an example, the spouse with the supplementary card (not their own card or account) could use that to apply for say a department store card. I NEVER recommend this strategy generally, but sometimes it's the simplest path when building credit, if done responsibly. If you have a card of any type, most department store's will automatically approve you for one of their cards with a low limit - say $300. Once you get this card, be diligent in purchasing small items from the store that you need anyway and immediately pay them off, right at the store. Never carry a balance on these cards as their rates are generally very high. Once you've done this for a few months, perhaps as long as six months if you have no credit at all, you'll find they'll generally increase your credit limit. This is a good first step. Today, many department store cards in Canada are also tied to a MasterCard. With one case study of mine, after the individual followed my recommendations with his responsible use of his department store card (a limit of $300), was offered a regular MasterCard with a limit of $3,500 in under one year.

Consider cash secured loans and credit cards as mentioned in my last post as well.

Q: Should I get my child/adult child a credit card to help them build credit?

A: As with the first question, if you choose to get your child, spouse or someone else a supplementary card to then assist them to apply for a department store card (as in my example), please keep in mind that you are still on the hook for the supplementary card. Are they responsible enough to stick to your rules for purchases? If not, consider that you are solely held accountable for covering all purchases made on any card or supplementary cards on your account. If you do totally trust your child, you may wish to have your bank or credit card company give you a low limit (say $500) credit card and get the supplementary card on that account. That way, if you were wrong about your child's spending habits, the worst you'd be out is $500, as opposed to some of the much higher limit products available.

The last time I spoke with VISA and MasterCard, they told me there is no age requirement for a parent wanting to get a supplementary card for their child. While I'm not a proponent of this notion, it might make sense if your child is travelling overseas on a trip, leaving to school for an extended period, etc. Instead of possibly having to wire money to your child, you could get them a supplementary card as an emergency option.

Q: If I get all those credit card offers in the mail telling me I'm pre-approved for $10,000, $50,000 or more, I must have good credit, right?

A: No, not necessarily. Credit card companies, unless you already have an account with them, can NOT access your credit report. That would be an invasion of your privacy if you have not authorized them to do so. These card companies are assuming you have good credit based on your postal code or some other list. Or, perhaps it's simply a numbers game for them - mail out enough of these offers and someone will actually approve for them. Always, always read the fine print. There you'll usually see a magic annual income needed for that approval along with a long list of other disclaimers and approval requirements.

Do you have a credit question of your own? Please drop me a line at and I'll address your question anonymously in the future or feel free to leave a post.

Finally, I stumbled upon this fantastic budgeting worksheet - check it out - (7 Steps that will help you build a budget that works).

No comments: