Being in the business of helping people build their credit and resources to become home-owners, I see almost every financial circumstance imaginable. Most are here because of bad credit, not enough savings or an inadequate work history. Or all three.
And I hear a lot of misinformation about what people think they should do to improve their situation. Sometimes the source of that information is from so-called experts. It’s just so wrong, at least if they want to own their own home—and that’s, of course, why people come to us.
So what is the worst financial advice I hear? Well, if you ever want to own a home, probably the worst financial advice ever is: “Cut up your credit cards; do everything with cash!” What planet are these guys from? Send them back!
If you intend to become a homeowner, you won’t be buying it with cash (unless you win a lottery). You will need a mortgage.
So why would any lender give you a mortgage? Of course, it’s because they can make some money from the interest on it when you pay it back. But that’s only if you pay it back. So, they want to be confident that you can be relied upon to pay it back before they will approve you for a mortgage. You’d do the same.
How do they determine whether you are reliable to pay it back? They look at your history; past history usually predicts future behaviour. Have you been responsible with paying back previous loans you have had. There are three possible outcomes:
1. You have not been responsible with paying back your loans. Denied!
2. You have minimal or no history of paying back loans. Denied!
3. You have been responsible with paying back loans. Approved!
There are a variety of loans they will look at but the most crucial one is what’s called “revolving credit,” aka, credit cards. If you have no credit cards, you fall into the second possibility above. You will be denied!
So, the only way you will ever get a mortgage is to have credit cards and then be responsible with paying them off
Now, it is not automatic. It still depends on a number of things: Is the credit card secured or unsecured? How high is the limit on the card? How high is the outstanding balance on the card? Have you paid your minimum amount due every month? And, is it a top tier or bottom-end credit card (they are not all the same)?
If you have not had a credit card before, chances are you will not have a good enough credit score to get a top-tier card (from one of the Big Five Canadian banks) that is unsecured and has a high credit limit.
But, you have to start somewhere. As the saying goes, you have to walk before you can run. You probably have to start with a second tier card with a low limit and is likely secured. But that will start a history that will eventually lead to a lifting of the secured part, an increase in the credit limit and, in time, approval for a first-tier card, with a high-enough, unsecured limit.
I’ve had people with low credit scores refuse my advice to get a low-tier credit card because they wanted only a good one. Guess what—they never got the good one, their credit score did not go up, and now they’re in no position to qualify for a mortgage.
Some say to me, “I can’t qualify for a credit card.” Baloney! Everyone can qualify for a bottom-line card. I get offers in my mailbox regularly guaranteeing me a credit card regardless of my situation. This is unaddressed (junk) mail, which means everyone gets the same offer. If your credit is bad, or non-existent, you will probably only be approved for a $300 limit and will have to put down security even for that, but it’s the place to get started.
So, if you have no credit cards and you ever want a mortgage, rescue that latest Capital One credit card offer from your junk mail, or go online, get that card, and get started.
On the other hand, “Cut up your credit cards and do everything with cash” is actually good advice for a few people. If you’re in that group that is so undisciplined that you will simply buy more stuff with more credit, not pay it off every month, and get into a worse financial mess, then that may be good advice.
But then you are also accepting the reality that: 1. You will never own a home (unless someone gives you one), and 2. You will probably always be poor.
And that’s not just as I see it. . . That’s fact.