Establish Credit
(or Re-establish Credit)

Know what creditors look for when you want to build good credit and improve your credit report

To build credit, it helps to know just what creditors are looking for.

Capacity  Can you repay?
Income: Employment, occupation, how long you've worked, how much you earn.
Expenses: Dependents, other debts, alimony, child support, etc.
Character Will you repay?
Credit history, responsible use of credit, "living within your means", stability (how long at current address and current job), own or rent.
Collateral What can they get if you don't repay?
Real estate, savings, investments, or other property which can used as a guarantee for the loan. For an automobile loan the vehicle is the collateral, and the lender can repossess it if you don't pay.

Credit grantors use different combinations of "The Three C's" to make decisions about whether or not they will offer credit to you. If you rank low in one area, you may be able to make up for it in another.

A Big Down Payment Can Help

You may be able to make up for a poor credit history when buying a car by offering to make a large down payment. By doing so, the lender's risk is reduced because they are putting out less money, but they have the security of the full value of the car.  The lender will also assume that you have more  incentive to pay, based on what you've invested in the down payment.  When the loan is repaid, you will find it easier to get other credit.

Find a Lender that Serves people like you.

Find a lender that targets your "profile". Some lenders just go for the cream of the crop. Others, known as subprime lenders, charge higher interest, but they specialize in helping people establish or re-establish credit.

Credit gets Credit

"It takes credit to get credit." That's not always the case, but having one account helps you get another, and then another.  The kind of loan or credit may not be what you are looking for at first, but it is usually worthwhile to open an account that you don't really need, just to establish the fact that you are a good risk, and you pay according to the terms.

Consider a Credit Union

If you have the opportunity to become a member of a credit union (through your work or other affiliations) be sure to join, and make regular deposits into your credit union account. Credit unions are often more willing to listen to your personal story, and are sometimes more lenient for establishing or reestablishing credit because they think of you as being "part of the group."

Try for a Department Store or Gasoline Credit Card

Having a card with a particular department store or gasoline company makes it more likely that you will do business with them. Companies are eager to offer them, so these kinds of credit card are often easier to get for people with little or no credit.  If you get one, be sure to use it, and be sure to establish a pattern of regular payments according to the terms.

Checking, Savings, and Utility Bills

It is important to have a checking account or savings account, or both. Checking and savings accounts don't show on your credit report, but they may be checked when you apply for credit. Lacking other credit history, a bank account shows that you have some money, and that you can manage it responsibly.

Telephone, gas, electric, and other utility payments are usually not in your credit file, but copies of your bills, cancelled checks, and pay stubs can be helpful with some lenders when you are attempting to establish new credit.

Consider a Secured Credit Card

Some financial institutions offer credit cards to people willing to deposit funds with them. The funds serve as collateral for the card, and your credit limit is not likely to be higher than the amount of your deposit. Nevertheless, the usage and repayment activity will be shown on you credit report, helping you to establish a track record that can earn you a "real" credit card in the future.

Get a Cosigner

If you have a friend or relative with good credit who is willing to back you up, look into the possibility of having them act as a cosigner for the loan.  Accounts in which there is a cosigner appear on both persons' credit reports. Be sure to make all payments in a timely manner - or to tell your cosigner if you are going to have trouble making a payment. Otherwise, both of you will have damaged credit!

A note to cosigners.  Do you want to cosign someone's loan?  Cosigning a loan can affect your credit score by increasing the amount of debt you have. Even if all payments are made in a timely manner, it may affect your ability to get new loans in your own name because it increases your debt to income ratio.
 

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