Do I Need to Establish Credit?
How Do I Establish Credit?
Why do you need to establish credit? You might need to if you are looking to purchase something by borrowing money, or you are looking to rent your first apartment, or get your first student loan. The first place that any creditor is going to look is your credit report.
Who needs to establish credit? Well, just about everyone, and we all have our particular circumstances in life. From our experience, there’s nothing to keep you from establishing credit if you want to.
- Maybe you’re young and haven’t gotten any credit yet.
- Perhaps you’ve recently had a bankruptcy discharged or you lost your job.
- You were taught somewhere in the past by someone you really respect to pay for everything in cash.
If you fall into any of these categories or any others not listed, the information below is for you.
Being in debt, to an extent, is a positive trait valued by lenders. No credit is almost as bad as bad credit. If you have good credit, you are showing everyone who looks at your credit report how you handle debt.
Establishing your credit and credit report will take a little bit of time, sometimes in as little as 3 months, but if you can start now, and go at least 6 months you’ll be on your way to getting the credit report and scores that you want and need. Building or re-building a credit report is not a quick-fix situation. It takes a year or two to complete.
If someone says it doesn’t take much time, run. However, it is easy to have a good credit report – pay your bills on time.
Follow the basics here and you’ll be on your way to lower interest rates, getting credit, and having higher scores.
Open a checking and/or savings account – This step is critical and probably one of the first steps you should take to establishing credit. With a checking account, you can prove what payments you have made for every credit account you have.
Stop paying your land lord cash for rent – In terms of buying a home, proving that your rent is paid on time every month is a big indicator to a mortgage lender that you will pay them on time. If you currently pay your land lord cash for your rent and you are serious about buying a home, then start paying them by check immediately. You can prove your payments with your checks. We hate to say this, but for the “right” price, a land lord can say anything while verifying your rent payments if you pay them cash.
Often, if you can prove payments are being made on time, you can get additional forms of credit. While these payments won’t show on your credit report nor will your bank account information this information is often used for credit references on credit applications.
There are two types of credit cards – secured and unsecured. Secured cards are easy to get and are very helpful for establishing if you have no credit or you are restoring your credit following some credit problems like a bankruptcy. No matter what type of credit card you apply for, make sure they report your payment history to the credit reporting agencies. This is especially important for a secured card because you want your credit usage and history reported so it will help your credit report and credit scores. Typically, to set up a secured card account, you will be required to put into a savings account some small amount of money, say $300. Then they give you credit based on how much money you have in your account.
Additional Credit Card Offers
Keep your credit card balances less than 50% of your credit limit!
Use Your Card Wisely and Timely – This is simple to say, not always easy to do – use your credit card for purchases and make sure to pay the balance or minimum payment on time. A rule of thumb here, keep your balances under 50% of your credit limit. This is a big deal for your credit score. When you balance is greater than 50% of the credit limit on the card your credit score goes down. There’s a more drastic drop in your credit score with your balance is greater than 70% of the credit limit. Key here is use the card a little – buy some gas or groceries once a month on the card and then pay it off every month.
Get a co-signer – Often a co-signer with good credit added to your credit application and your lack of or negative credit history can make all the difference for you getting your credit approved. Have someone, typically a family member, co-sign for you and take out a personal loan at a bank and and then pay the loan back on time. Again, make sure the bank will report the credit history on the loan to the credit bureaus so it helps your credit report.
Ask questions if you are denied credit – If denied credit, ask why – you have a right to know. Most creditors will give you some reason as to why your credit application was denied. Reasons why most folks are denied credit fall into three things: insufficient income, inconsistent employment history or a poor credit history/report/scores. If you are turned down for credit, you can request a free copy of your credit report to see what the reasons might be if they are related to the information found on your credit report – like erroneous information, or fraudulent activity etc.
See: Identity Theft
Limit your credit inquires – this is important for two reasons. 1. Some creditors, like a mortgage lender, want to know what credit inquiries are on your credit report and whether you got new recent credit while you are applying for a mortgage. If you have and it isn’t reporting yet on your credit report you could be turned down for having too many monthly payment obligations for the mortgage loan guidelines to allow. A rule of thumb here, if you applying for a mortgage, don’t take out other credit until you got the mortgage. 2. Generally speaking, the more credit inquiries, the lower your credit scores.