It's
easier to borrow money once you've established good credit. And it takes
time to establish good credit. But here are some simple rules that you
can follow.
Rules For Establishing Good Credit
Rule 1: Pay your bills on time.
Rule 2: Manage the amount you borrow.
Rule 3: Limit what you borrow to what you can afford to repay.
Rule 4: Limit the number of credit cards you have.
Rule 5: Don't apply for too many credit cards at the same time.
Rule 6: When you borrow, shop around for the best deal.
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When
you apply for a loan, mortgage or credit card, banks look at three things:
credit worthiness, financial means and debt structure.
Credit worthiness.
This is your credit history. It is recorded in a credit report. Banks
look for a history of paying your bills on time.
Financial means.
This is your income. Can you afford to make the payments required to repay
the money you borrow?
Debt structure.
This is your other financial obligations. Are you living within your means?
Do you have other debts? How likely are your other financial obligations
to get in the way of repaying the money you wish to borrow?
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How
Much Will Banks Loan You?
While
a bank takes many things into consideration, one of the things it considers
is your debt-to-income ratio, the total amount of monthly payments on
debts you already owe divided by the your monthly income.
To find out how banks will view your situation, check out our Debt-To-Income
Calculator.
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Step-By-Step
Guide To Establishing Good Credit
It's
harder for those with no previous credit to borrow money than it is for
those who have established good credit.
1. The best way to establish credit is to pay your bills on time.
2. Often it is easier to get a secured loan than an unsecured loan. Auto
loans are a good place to start.
3. Getting a parent to co-sign a loan can help you over the hurdle of
getting your first loan.
4. Some companies offer what looks like a credit card but is actually
secured by money you give them in advance. You are, in effect, borrowing
against your own money-and paying interest to do it.
Although this is not a good financial deal, it can help you establish
credit. The key here is to make your payments on time.
5. Some banks will let you secure a loan with money you have in a savings
account. This is sometimes called a Passbook Loan which freezes part of
your account to guarantee payment. This means your savings are not available
to you until you have repaid the loan.
On the other hand, this is one route available if you are having difficulty
establishing credit. Again the key is making your payments on time.
6. If you have a car that is already paid off, banks may loan you cash
against the value of the car and secure it using the car as collateral,
just as they do with a new car loan. Remember, you are using the loan
to establish credit, so be religious in making your payments on time.
One way to insure this is to take the money you get from the loan, put
it in the bank and use it to repay the loan.
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How
To Increase Your Line Of Credit
What
if you have a credit card and you want to make a purchase larger than
your credit limit? You may be able to increase your line of credit.
Many banks who issue credit cards do it automatically after you've had
a good history of repayment.
You can also call the bank or the company issuing the card and request
that they increase your line of credit. They will probably request a credit
report and review your credit history. For this they will need your Social
Security Number. They should be able to give you an answer within minutes.
Don't forget, the key to increasing your line of credit is paying your
bill on time.
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Finders
Fees And 900 Numbers
Sometimes
you will see an ad with a 900 number offering to give you credit, often
to "consolidate debts"-or you will find a company that requests
a finder's fee to set you up with a credit card. Usually these offers
look too good to be true. They usually are. Investigate them carefully.
If you are credit-worthy, a legitimate lender will lend you money without
charging a finders fee. You just need to be persistent.
If you are not credit-worthy, someone may be willing to take a risk, but
you will pay for their risk. They will charge a higher interest rate,
"processing fees" and other fees and expenses to help hedge
against the risk. It's up to you to investigate what the total cost of
the loan will be and decide whether it's worth it.
You may also see ads offering to repair your credit. Beware! There is
no way of getting instant good credit. Building a credit history takes
time. If you question the services offered, you may get evasive answers,
or statements that imply help with solving your credit problems without
actually committing to any results-all for a fee. Repairing your credit
is a process that can't be shortcutted. Companies that try to charge
you for repairing your credit cannot deliver what they promise.
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