How to Build Credit

We get asked quite often about how to build or improve your credit. Credit is, after all, a tricky thing, especially if you’ve never had credit before. The word itself originates in the Latin creditum, which translates as “loan.”

 Credit is borrowed money that you can use to buy things when you need them. Someone, a grantor, like a bank or credit card company, will grant you credit as long as you agree to pay them back.

There are four types of credit:

(1) Revolving credit: With revolving credit, the grantor gives you a maximum limit, and you make charges to it. You carry a balance, or “revolve the debt”, and make payments. Most credit cards are revolving credit.

(2) Charge cards: These look like credit cards except you must pay off the balance at the end of each month. This is the original concept for American Express.

(3) Service credit: Another way to think of service credit is to think about your utility bills. These agreements are all examples of credit. They give you electricity or mobile phone service so long as you agree to pay them each month.

(4) Installment credit: A lender loans you a specific amount of money, and you agree to repay the money and interest with regular installments of a fixed amount over a set period of time. Car loans and mortgages are two examples of this.

Life is expensive. Because people are not sitting on a large bundle of cash to buy a new house or car, they borrow the money from a lender with a promise to repay over time. How you manage your credit determines your chances of receiving a favorable interest rate when the time arrives.

Think of it as a risk assessment. Would you loan money to someone who has a terrible record of repaying you or others? Lenders will consider your income, how long you’ve lived where you live, how long you’ve worked for your employer, and what kind of assets you have before they decide whether or not to loan you money.

But if you’re young, you probably have no credit history. It can difficult to establish credit.

Here are a few ways you can start or build credit:

(1) Co-signer. This is the easiest way to enter the credit market. If you have a parent or grandparent who’s willing to co-sign on a loan or credit card, you will instantly enter the credit market. You must be cautious, though, because how you manage your credit directly affects the credit of your co-signer.

(2) Apply for a small credit card. In the era of multinational financial institutions, applying for a small-balance credit card might be the way to go. Large institutions, because of the sheer size of their transactional business, can afford to take more risks than smaller banks. Companies like Chase or Capitol One might grant a $500 or $1,000 to a student who’s trying to build their credit.

(3) CD loan. Commercial banks offer their customers certificates of deposit, or CDs, as risk-free, interest-bearing notes. You deposit a specified amount of money with a bank, and the bank promises to repay the amount, with interest, on a certain date. Some banks might allow you to open a CD so they can hold it as collateral against your loan.

Whatever your need to borrow money, one of the first things your loan officers will ask you about is your plan to repay the loan. Before you visit a bank, ask yourselves the following questions:

(1) How do you plan to spend the money you borrow?

(2) If you simply want to build credit, why?

(3) What is your overall objective?

(4) How do you plan to repay the loan?

(5) What other factors do you think your loan officer needs to know?

We hope you find this information helpful! To learn more about the kinds of consumer installment loans we offer, visit our website here.

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