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Good Credit, Bad Credit and No Credit
Having good credit allows you to borrow more money at better interest rates. This proves particularly influential when applying for large loans like a home mortgage or small business loan. Many potential employers also look at credit reports as a means of determining how responsible -- or risky -- an applicant is.
Bad credit can work against you in tremendous ways. Securing loans at reasonable interest rates can prove extremely challenging or impossible. Late payments and high balances on accounts are primary factors damaging credit, but even things like unpaid medical bills or having a number of new accounts all at once can affect your credit negatively.
Often, having no credit can be as detrimental as, or worse than, bad credit. Without a credit history, lenders do not have an adequate indication of what kind of credit risk you may be and may not wish to extend you credit or a loan. If they do extend credit, it is likely that your credit line will be minimal to start with.
How to Establish Credit
Take the time to develop your credit history. Within one year, by creating and maintaining active accounts, you can demonstrate that you are a reasonable risk to a lender.
Here are a few tips to establishing credit:
- Open a checking and/or savings account. A checking or savings account is crucial in proving to creditors that you can handle money. If possible, set up overdraft protection for your checking account and monitor your accounts closely.
- Borrow good credit. One of the best ways to get started establishing credit is to have a family member with strong credit add you as an authorized user on one of their active credit accounts. You do not even have to use the account and the activity will still be associated with your credit history.
- Borrow against savings. As you venture into the world of credit you will encounter two basic forms of loans, secured and unsecured. A secured loan is backed by assets belonging to the borrower, which decreases the risk to the lender. Ask for a small loan secured by money you have deposited into a savings account. You don't have to spend the money, just borrow it and pay it back over several months. It will cost you a few dollars because the interest from your savings will likely be less than the loan interest, but it is well worth the price.
- Take out a small installment loan. You may need a co-signer (someone who becomes responsible if you don't make the payment), but an installment loan is another good start. With this loan, you borrow all of the money at once and then pay it back over a set period of time at a set interest rate. These loans are often secured by the products you are purchasing (if you don't pay the loan, the lender can repossess the property) or by the co-signer.
- Begin with a single credit card. A credit card can help establish your credit history. Just be sure to use it sparingly and repay it in full on time. Start with a single credit card, as every inquiry into your credit history from potential card issuers can have a negative impact.
- Pay attention to your payments. Two more ways to establish solid credit are to make timely payments and to pay more than the minimum amount required. A late payment can be very damaging to your credit. Better not to take out loans and credit cards if you can't meet these two basic criteria.
Whether you currently have bad or no credit, know that you too can have a stellar credit score with a little time and diligence. Just remember to pay your bills on time and to keep an eye on your interest rates.
Are you ready to start establishing credit? Contact us today to learn about savings and checking accounts and share secured loans.