Today we’re going to talk about establishing credit. First, I want to get into six reasons why establishing credit is so important.
1. Lower interest rates
The first is lower interest rates. Having an established credit score and a good one at that, we actually help you become less risky to the banks. This means that they’ll give you loans with a lower interest rate. This will save you literally tens of thousands of dollars over the course of your lifetime.
2. Buying a house
Buying a house is actually dependent upon how creditworthy you are. If you don’t have a credit, you’re most likely not going to get approved for a mortgage, unless your spouse or significant other has a really good credit score, or if you come to the table with a lot of cash as a down payment.
3. Renting a house or an apartment
Landlords look at credit scores. When a landlord sees someone with a high credit score, that shows him that they’re most likely going to pay the rent every month and that they’re less risky as a tenant. Now, if you don’t have an established credit score, it’s going to be much more difficult to rent a house or an apartment to you.
4. Buying a car
Buying a car is one of the biggest financial purchases that we’re going to make in our lifetime. It only makes sense to have a good established credit score in order to get a loan and a low interest rate on that vehicle. If you don’t have established credit, you will most likely have to pay for the car in cash.
5. Getting a job
Believe it or not, employers look at credit scores to see if you have an established credit or a positive credit score. They’ll consider someone else for the position, if your credit score is low or not established.
6. Starting a business
Some people go to the friends and family when asking for a loan or borrowing money, but in traditional business you need to go to a bank in order to get a good chunk of change. If you have no established credit, the bank is not going to lend you that money.
Now that we’ve gone through six benefits of establishing your credit. Here are four ways to actually do so.
Secured credit card
Secured credit card is backed by cash that you put into a CD. It’s deposited with the bank that you’ll be getting your secured credit card from. Essentially, you use it like a regular credit card, except that you have essentially a limit for the amount that you deposited. If you deposit 500 dollars, they will give you a 500 dollar secured credit card, meaning that you can only charge up to 500 dollars in that card at any given time. You can use it like a regular credit card for gas, food, bills, and things like that but it’s not meant to be used forever.
The goal is to build up enough credit or trust with the bank that you get the secured credit card from in order to get you an unsecured credit card with a higher limit.
Credit-builder loans
Credit builder loans are a great way to bump up your credit score from 40 to about 100 points within six months. This is a loan to yourself held by a bank. What you do is you give the bank X amount of dollars. Let’s call it 1000 dollars. They take the 1000 dollars and put it into a savings account or a CD. Think of this as a forced savings plan. Then they issue a loan against those 1000 dollars to yourself, which then you pay off every month. Once it’s repaid, you get that money back plus the interest that you’ve accrued over the time and that it’s been in the CD or the savings account. This can also be a double-edged sword because if you don’t make the payments on this loan, it can hurt your credit score as well as improve it. A good website that does this is called selflender.com. If you want to learn more about it, check this website.
Get a Co-Signer
Equal responsibility for the debt is one of the biggest problems with getting a co- signer. This is a great way to ruin a relationship if you don’t pay back your obligation. For example, you want to go and get a car that you didn’t have the established credit for. A parent or a significant other can go and co-sign that car with you. However, if you don’t make the payments, the payments go back on them. That can also hurt their credit as well.
Authorized user on someone else’s credit card
It allows you to piggyback on someone else’s unsecured credit card and use it just like it’s your card, their limit is your limit and vice versa. However, just like in getting a co-signer, you’re not obligated to pay back the debt, so that is also a great way to ruin a relationship if you rack up a lot of credit card debt on someone else’s card and don’t pay it back. They are not going to be too happy with you.
There you have it. Establishing and maintaining good credit can save you literally tens of thousands of dollars over the course of your lifetime.
by Marco — WhiteBoard finance