How to Establish Credit
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
What Banks Look At and Why?
When you apply for a loan, mortgage or credit card, banks look at three things: credit worthiness,
financial means and debt structure.
This is your credit history. It is recorded in a credit report. Banks look for a history of paying your bills on time
This is your income. Can you afford to make the payments required to repay the money you borrow?
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?
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 your monthly income.
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.
- The best way to establish credit is to pay your bills on time.
- Often it is easier to get a secured loan than an unsecured loan. Auto loans are a good place to start.
- Getting a parent to co-sign a loan can help you over the hurdle of getting your first loan.
- Some companies offer what looks like a credit card but 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.
- Some banks will let you secure a loan with money you have in a savings account. The bank would freeze 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.
- 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. Rmember, you are using the loan to establish credit, so be religious in making your paments on time.