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A guest post from Riley Finnigan of Creditscore.net
We live in an age of credit. Like it or not, paying cash is actually detrimental to you if you ever intend to buy a large-ticket item, such as a home or a new car–establishing credit is vital in order to do that. Otherwise you’d be working for years, saving every dime, and still couldn’t afford a house and property. Even the cheapest new car costs $15,000 or more. There is no time like the present to start building a credit profile. Following are a few tips on how to do it.
Take Out a Small Loan
Building a credit profile can take quite awhile, especially if you want to do it right. The best place to start is to take out a small loan. You don’t necessarily even need to use it for anything in particular–most lenders know you have to start somewhere to build a credit history, so they may be willing to work with you. If you already have a checking or savings account with a bank, you should start with them. Ask for a small unsecured loan. If they aren’t willing to take a chance on you, then try and find a cosigner–someone with established credit that will take responsibility for the loan if you can’t pay it off. This will usually be a parent or close relative that knows you well and trusts you–after all, they’re taking a chance on you.
Explain Your Motives When you go into your bank and ask for a loan, be prepared to answer a few questions. Keep in mind that banks are financial institutions that are in business to make a profit. They only make a profit on a loan if you pay it back, with interest. Talk to a loan manager and explain that you want to take out a small loan in order to build a credit profile. Lenders understand that everyone has to start somewhere, so if you have had a checking or savings account with them for awhile, and there haven’t been any issues, such as being overdrawn, then they may be willing to take a chance. However, they will want to know what the money is going to be used for, how you plan to pay it back, and what you have of value to secure the loan, if anything.
You Must Have a Source of Income
There aren’t very many lenders that will give you a loan if you can’t show them how you’re going to pay it back. You must have a source of income before they’ll even consider giving you money. If you have a steady job, they will want to verify that you’re making enough to enable you pay them back, with interest. The best way to build your credit profile is to ask the bank to issue a credit card with a line of credit equal to the amount you want to borrow.
Secured Credit Card
A good way to build your credit is ask for a secured credit card. A lender may be more willing to do this than simply lending you money, because with a secured credit card you will have to maintain an account in the bank with a predetermine amount of money in it. The secured credit card can be used like any other credit card, except you’re limited to the amount of money in the account. A secured credit card is different from a debit card, which isn’t a form of credit at all, merely a way for card holders to more easily access the money in a checking account. With a secured credit card, your transactions will be reported to the credit bureaus, thus establishing a credit profile.
Direct Deposit Loan
A direct deposit loan is a form of credit whereby you can write checks for more than you actually have in your account. Instead of being overdrawn, the money will come from a line of credit, which must be repaid, with interest. Because this is unsecured credit, it will help build a credit profile.
Borrow Some More
Once you’ve established credit by taking out a loan and paying it off, you will have to continue to build your credit rating by taking out additional loans, and repaying them. This process can take years, but if you do it correctly your credit profile will expand, and your credit score will go up. As your credit rating increases, so will your potential to borrow money and establish higher lines of unsecured credit. In building your credit profile you should continue to carry some debt. Due to the fact that your credit rating will continue to increase if you owe money, you shouldn’t pay off your credit cards every month. Instead, let a portion of the debt carry over, because your credit score is not based entirely on whether or not you owe money, but is based in part on the percentage of debt you have weighed against the amount you’re entitled to. For instance, if you have a credit limit of $5,000 but only owe $100, your credit rating will be higher than if you have that same credit ceiling but owe $4,000.