How You Too Can Establish Good Credit ---- A Few Easy Steps That Are NeededMar 24 '06 (Updated Mar 28 '06) Write an essay on this topic.
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The Bottom Line It is important to establish and maintain good credit, but it isn't the easiest thing to do.
Credit is an important commodity in society today, as most of us need it in order to get through our lives. Some people don't have to worry about credit, or mortgages, or loans, and those are the lucky people. For the rest of us, if we want to purchase a new car, buy a house, or anything else that costs more money than we currently have, credit becomes the most important thing in the world. Having bad credit or a record that shows bad credit can be a virtual death sentence in the world of finance. If lenders decide that you are going to be a risk, it will cripple your ability to get a loan, so you either need to maintain good credit, or fix your bad credit. Saying it sounds much easier than it actually is, and there are a few steps that people must take in order to insure that their credit report stays clean enough to not present a risky investment. Why Having a Good Credit Report Is Important When banks, credit agencies, and lending firms are looking at whether or not they are going to give you money, they want to first examine whether you are a risk to them. Keep in mind, that it doesn't matter as much about your opinion of your own finances, but whether they think that you will always be able to meet your payments. They do this by reviewing your history, what you are making at your current job, how much you pay on rent already, and they throw it all into a formula that they have. This gives them numbers to work with, creating an amount they feel you can afford to pay on a monthly basis. That is when they start looking at amounts that they can loan out, and if you don't have a good showing up till this point, the loan could be far below what you are asking for. Not only that, but your loans could have outrageous annual percentage rates, that could bury you under debt for the rest of your life. How To Establish Good Credit In The First Place Credit scores are based on a scale of 800 point (yes like your SAT sections) with the better credit scores being as close to 800 as you can get. Basically if you have 800, you pose no risk on any loan, and could probably get as much money as you wanted. The further away you get from the 800, the higher the risk you serve to the credit institutions, and thus the less likely you are to receive what you are looking for. So you want to make good decisions that will get you close to 800, and you want to create situations that will benefit you with a better score. The first step, is to never over-extend yourself. Attain a checking account, but make sure that you are never overdrawn, and that if it ever occurs, that you pay off the fees immediately. Likewise, don't bounce checks, because that will really come back to bite you later on. Bouncing a check on accident, shows up as being just as bad as doing it on purpose, because all the information will show is that you tried to pay for something without having sufficient funds. All of the excuses in the world won't amount to anything if the piece of paper says that you did indeed bounce a check. So, keep a clean bank and checking account, and you won't lose points. The downside, is that you won't gain any points by doing everything right here. Credit cards sound like a great way to attain good credit, but they are hard to get with high spending limits if you haven't established yourself. You can however, attain lesser cards at stores and gas stations. These cards will have very low limits on how much you can spend, and on the down side they will have very high interest rates. The trick with them, is to use them to make purchases, but to pay off those balances as soon as you can. You don't want the interest to build, and send you into debt just because you were trying to set up credit for yourself. These cards aren't all that difficult to attain, and once you have done so, you can set yourself up for real credit cards. It is VERY important that you don't apply for too many lines of credit or credit cards at the same time. When you apply for credit, your report is marked with a notation from the company that is searching you out. This stays there, and can be seen by other people who you may want to have lend you money. If there are a lot of requests on there, a creditor could look at is as too risky, because you could be setting up a lot of debt for yourself with different agencies. So, keep your credit requests to a minimum if possible, and wait on responses if you are applying for a credit card. One of the other ways to maintain your credit score is to always pay all of your bills on time. It doesn't really help you in the end, because companies don't report who their best customers are, but they do turn in who their worst customers are. If you fall behind on a cell-phone bill, an electric bill, or any other utility (like cable), you could be reported as a risky customer. Companies only really want your money, and if you aren't paying on time, they aren't going to be very happy about it. I have a direct withdrawal set up for nearly all of my payments, so that I don't have to worry about not paying something on time. Besides, if you don't pay them on time, you could end up losing your cable or electricity as well, which is a big negative in my book. Maintaining a static address and and steady employment is also a big selling point for creditors. If you can prove that you are going to be sticking around in your current job, and you aren't a risk to move around frequently, this will look good to a potential lender. They want to know that you are going to have that steady source of income in order to pay them back with interest. It makes sense when you think about it, but it isn't always the easiest thing in this market to stick with one job for an extended period of time. One other tip, is that you could go with a secured credit card that is offered by a lot of banks and credit unions. The way that this card works, is you set down a certain number of dollars, and are matched in credit on the card by the institution. Most of them will double what you put down, so for instance if you put down $250 or $1000 on a card, the bank would extend the limit to $500 or $2000. The money is still yours to spend, it just means that the amount of the card will be deducted before the credit part actually kicks in. This helps the bank/credit union see that you are going to be reliable, and that you are going to be willing to pay your bills using your own money, and not rely on them to cover you. How Credit that you already Have works When you have established that you can get a credit card, and when you actually get one, there are some simple rules that you also really need to follow closely. Under no circumstances do you want to over-spend on your card. By doing that, you could be hurting your credit, and causing yourself to lose points that it took you a long time to earn. Also, never pay your credit card payment late. Your credit report will flag how late it was (for example 30 days, 60 days, 90 days etc). This sticks with you for a while, and really hurts your score, because it makes you look like you can't handle credit when it is given to you. The other thing to do, is make sure that you leave a gap on your credit cards between how much you are using, and how much credit you still have available. Unused credit on your cards can be helpful to keeping your scores high. Unfortunately, this can also be a bad thing, because if you have too much unused credit it is just another risk that they get worried about. So, find a safe balance between the two, and just always make sure that you aren't maxing out your cards. Keeping your good credit can be done in a few easy steps. By paying off all of your bills on time, not over-extending your credit cards, and by holding back on the requests to get more credit, your rating will improve. Keeping your rating high will show the banks how well you can handle your finances, and when it comes time to ask for a mortgage or a loan to buy a car, you are going to receive terms that will be to your liking. The better your credit, the more money that they are going to offer, the more people that are going to want to offer you that money, and the better that your interest rates are going to be when you get it. My Final Advice on Establishing Good Credit The thing about credit, is that it is how other people view your financial situation. Don't be discouraged if you don't agree with them, and you think that you should get a high level credit card right away. Take a moment to understand where they are coming from, and why they might think that you are a risk. The common theme, is that you have to establish credit before you can get credit, but it seems difficult from the out-set to actually establish it in the first place. It is a paradox sometimes that you have to attain what someone else won't give you. So, take my advice on the simple steps to creating credit for yourself, and I think you will be heading down the right road to helping your situation later in life. It's not a process that happens over night, and you have to start early, and be patient, as your score improves over time. Good luck in your goal of establishing good credit!!! 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