Establishing Credit

Credit = convenience
We live in a consumer-driven society. We enjoy nice things like cars with more options and big houses. If we all had to work and save until we could pay cash for something, many of us would never be able to have those things.

Being able to buy and use something now and then pay for it later opens many doors. This can greatly improve our quality of life. Establishing credit and proving creditworthiness to lenders can make life easier in many ways, but with credit comes responsibility and making good on your promise to pay.

It can be easy to spend more than you normally would when you aren't pulling green bills out of your pockets. Even so, credit can help you get that nicer car, a home you otherwise could never afford, and serve as a comfortable security blanket in case of an emergency.

What are creditors looking for?
Establishing credit takes time and discipline, but once you've proven yourself to lenders, you may be offered more credit than you need or want!

Creditors look at many factors to determine the risk in lending to you, which will affect whether or not you are granted credit, and at what price. Some of these factors include income, payment history on past debts, current debts and expenses, stability of employment and residence history, credit history including FICO score, and assets which can serve as collateral.

Lenders want to know that they are loaning money to a person who is not only financially capable of paying them back, but is also of good character and wants to pay them back.

Even with the income to support your lifestyle and all good intentions to pay, it can be difficult to get the first few lenders to take a chance with you so you can prove yourself.

Getting that first credit account
If you have a willing co-signer with good credit, possibly a parent or spouse, you can get a loan or credit card based on their credit history and so may be offered better terms than you would otherwise. You would be the principal account holder, you are responsible for the charges, and for making sure the payments are made on time.

The co-signer usually has no other involvement unless you default on the loan. This person, who is doing you a favor by co-signing to begin with, would then be required to pay the bill or receive negative reports on their own credit history.

If getting a co-signer is not an option and you have to go it alone, getting a secured credit card may be another alternative. It requires a deposit that you'll eventually get back as long as the bill is being paid on time. Just having the account open and not using it won't establish credit very quickly.

Whether you get a credit card with a co-signer or a secured credit account, don't spend more than you should just to build credit. You could use your credit card each billing period for something you normally buy anyway, like gas or groceries, and then pay it off each month on time.

The key to using a credit card to build credit is not letting the charges get out of hand. You'll pay interest on anything that's not paid off by the end of the grace period, and that interest can add up quickly. Paying only the minimum payment may be the fastest way to permanently stay in debt, and your goal is to build your credit, not drown in debt.

Department stores, furniture stores, gas stations, and other merchants may offer their own in-house credit. They often charge the maximum interest rate allowable by law, but it may be easier to get credit with them than with a major credit company. They're more likely to extend credit to you because they hope you'll be back to shop in their store.

If making a large purchase, as for appliances or furniture, some stores will offer a deferred interest program such as "6 months same as cash." You apply for the credit, make the purchase, and pay no interest if the entire balance is paid off before the 6 months. Save the money needed each month and before the end of the 6 month period, send the entire amount for payment in full. It's great to pay the whole thing off, a large purchase with a high interest rate and minimum payments can hurt you in the long run.

Keep it manageable
In your quest for the perfect loan, be sure you don't apply for credit with too many companies within a short amount of time. Applications for credit show up on your credit report whether you are approved or not. They wonder why you, all of a sudden, are in need of so much credit. This can scare lenders, they're afraid you might get more credit than you can handle or are planning a big shopping spree before you flee the country under an assumed name.

When you do get credit, be sure to always pay your bills on time. Keep your balances manageable and avoid going over your credit limit. Keeping your accounts "maxed out" makes it look like you can't afford your lifestyle, so they are less likely to extend additional credit later. Do this for a couple of years and you're on your way to established credit, better rates and incentives, and lenders happy to do business with you.