How to manage credit successfully

As immigrants coming into a new country, there is so much to learn and experience daily. Some of us are accustomed to relaxing on sunny beaches and complaining about the temperature being too hot. We have now shifted to the other extreme. One where we complain that the temperature is too cold, and we are forced to pack on layers of clothing to keep warm. Navigating the new environment is not a piece of cake, especially as it relates to managing your finances, and more importantly, your credit.

In North America, credit is king, and having a good credit score is key to getting a mortgage, car loan, credit card and other loans.  As immigrants, along with our suitcases, we brought with us attitudes and perspectives from our home country. Some of these ideas will help us, and others may do more harm than good. For instance, some persons immigrate to a new country and develop a fear of using credit cards, because they do not know how to properly manage it. Just like all other fears, it can be useful and healthy because it helps us to stay within boundaries that will keep us safe. It can, however, become harmful because it can become a road block between you and your financial goals. This fear can be employed in a productive and beneficial way; but only with sufficient financial knowledge.

Types of immigrants

Let’s look at some types of immigrants that exists:

The first type of immigrant is the one who is excited about their move to a new country; so excited that they decide to celebrate, going wild in their spending. Now in a new environment, with stores from which to buy shiny new toys, these immigrants pull out their credit cards, buying every little knick- knack that their hearts desire. These excited immigrants’ line of reasoning is that they were deprived of all “necessities” in their home country, and now, free to buy what they want, are deserving of a treat. They often continue to regret this decision, due to its negative effect on their credit score.

On the other hand are the immigrants who have an unfounded fear of credit cards. They have been bombarded with innumerable horror stories of the of credit card debt; so many that they choose instead to use cash for everything. This fear keeps them from accumulating debt, but it also prevents them from achieving some of their major financial goals; such as buying a house, buying a car, and more.

How can we have a healthy balance between both sets of immigrants; those who are afraid of credit cards, and those who are overwhelmed by their usage of credit cards?

I would like to propose a third type of immigrant – the balanced immigrant. The balanced immigrant is one who is financially aware and uses his or her knowledge to make wise financial decisions. This immigrant knows that credit cards are useful and are necessary to survive in the economy. They use their credit cards and pay their balances before the due date. As a result of this; they are able to build their credit so that they can acquire loans for the things that are important; things such as a house or car.

Knowledge is Power

Being aware of how to acquire and use credit, can help us to accomplish some basic things such as a house and a car, amongst other goals. Chances are, we may not be able to save up enough money to buy a brand-new car or even a second hand one; however, we can get a car on credit.

Credit allows us to acquire things faster than we could on our own. We will still need to save money so that the amount that we borrow and owe is less than if we were to borrow 100% of the required amount. The money saved could be used as a down payment. There would be no need to borrow as much, and debts could be paid off in a shorter time frame.

Use Credit Wisely

I have heard stories of people with five or more credit cards, each card having a high credit limit and balance. There is no need to have so many credit cards. I think you just need one credit card with a decent credit limit. Use only what you can afford to pay each month. That way, you get to build your credit interest free.

It is very easy to get suck into a debt spiral as there are no required minimum amount for a credit card transaction. Persons can purchase items that costs as little as $1 or $2 using their credit card. This ease of using credit cards make buying a lot of things and generating a high credit card balance effortless. There is also the thought that the item is not expensive, after all it is just $5 or $10, surely you can afford to treat yourself.

Credit Score

Another thing that persons should be aware of is that each credit card limit affects your credit balance and score. Let’s look at a hypothetical example. Sally has two (2) store credit cards – Walmart and the Brick. She also has credit cards from three banks – RBC, BNS and TD. The credit limit for each store credit card is $5000.  The credit limit for the banks credit cards is as follows – RBC $5000, BNS $3000, TD $10000. All these credit limits will affect Sally’s credit score. So even though Sally may not be actively using four of the five cards and there is no outstanding balance, the credit report takes into account the full amount that is available to her. The credit rating agencies will compute Sally’s available limit ($28000) and assign a credit rating score. Credit cards are just one component of an individual’s credit score, this article shares the other elements.

Credit scores are a three digit number, ranging from 300 to 900 (depending on the credit score model). These credit scores affects the amount that can be borrowed, the interest rate and the repayment period. A high credit score allows a person to benefit from lower interest rates, resulting in a reduction in the amount of money required to repay the loan. This results in more money to do the things that matter to you. A high credit score is more beneficial than a low credit score in both the long and short term.

Credit is not all bad. It allows us to do things that we would not be able to do otherwise. We use credit– mortgage for a house. We use credit for student loans, we use credit for car loans. The important thing is to ensure that you manage your credit well.

Bear in mind that the North American economy runs on credit. For instance, most transactions require a credit card. I have heard of people needing to book a hotel or rent a car and even though they had the required cash, they were not able to get the room or rent the car.

Conclusion

In summary, it comes down to managing what you have and what is available to you. Good money management will go a long way in ensuring that you accomplish your goals and dreams. Using what you can afford to pay back and not taking advances on your credit card as well as paying on time will be vital in ensuring your financial freedom. Financial knowledge is the key to a favourable and prosperous future.

Interested in learning more? See the article on how to make cultural shifts for additional tips on how to immigrate successfully.

*Stock image provided by Pixabay.