You can’t get a loan without good credit. You can’t get good credit without a loan.
What are you supposed to do?
Let’s explore the world of credit building!
I am going to state one thing that you need to take seriously.
There is NO “quick fix” to building credit, or repairing credit.
Do not believe the ads saying they can fix your score quickly. Stay away from the marketing promos telling you how their product will help you. Fight off the “no credit? bad credit? Instant approval” pathways that are everywhere.
I will say it again. there is NO “quick fix”. None. At all. What-so ever.
Why does good credit matter? People evaluate your credit report/score when considering you for…
- New loans (auto, house, credit card, student loans)
- Apartments & Rental properties
- Utilities (electricity, gas, water)
- Cell Phone Contracts
- Cable / Satellite Television
- Employment / Job Offers
…to name a few. Not only can bad credit disqualify you from getting loans and enjoying lower interest rates, but it can also stop you from getting an apartment, turning on utilities, and even getting a job!
There are two types of loans.
- Secured Loans: A loan that is backed by collateral. Your vehicle, house, or cash for example. In the event that you stop paying on this obligation, the lender will take possession of the collateral and sell it to recoup their losses. To clarify, the lender wants their money back, not your property. So they will sell the item to pay themselves back.
- Unsecured Loans: A loan that is NOT backed by anything. Credit cards, personal loans, and lines of credit are all unsecured loans. In the event that you stop paying on this obligation, the lender will not have any physical collateral to take possession of.
Because your credit report has not yet proven that you can be entrusted with unsecured money, getting a Secured Loan is always easiest.
Three Most Popular Ways To Establish Credit
- Apply for a Secured Credit Card: A secured card is backed by a cash deposit that you make up front, usually the same amount as your credit limit. Any financial institution should provide this to you, regardless of your past credit performance (or lack there-of).You will use this card like a traditional credit card. Buying things, making payments, etc. Your cash deposit is used a collateral if you don’t make the monthly payments. When you close the card, you will receive your deposit back.These cards aren’t designed to be used forever, but rather to build a stronger credit report that will make you eligible for an unsecured credit card (not backed by your cash, a car, etc..). Be sure to find a secured credit card with a low annual fee.
- Find a Co-Signer: You can typically get a loan for a vehicle, credit card, mortgage, or whatever you are seeking if you have a well qualified co-signer (somebody who has great or excellent credit). By them vouching for your lack-of-credit, the lender can distribute the risk of repayment across both of you…increasing your odds of getting approved.However, be sure that you and your co-signer fully understand that if you stop paying, the cosigner is 100% responsible for that loan. Any late payments, missed payments, charge-offs or repossessions will reflect on yours AND their credit report equally and fully.
- Provide Down Payment: A down-payment is a sign of good faith to the lender and minimizes their risk of loss. The more cash you can put down, the higher the chance you will get approved.Example: You want to buy a car worth $10,000. As we all know, cars lose value each year. If you put down $3,000 on this loan, the lender will only have to lend $7,000. Statistics show that borrowers who have something to lose (their 3k in hard-earned cash) will often work harder to repay the loan. If you DO default, the lender can repossess the vehicle and not have to worry about the vehicle being worth less than the loan is.Offering a down-payment is not only going to make you more likely to get financing, but it puts YOU in a stronger financial position in the event that your vehicle becomes totaled, irreparable, or severely damaged. You will not have to worry about owing more than it’s worth and making payments on a vehicle that you cannot drive.
Three Ways To Avoid When Building Credit
- Cell Phones Do Not Equal Good Credit: You might hear a cell phone company, cable company, or apartment complex try to advertise that they report to the three credit bureaus (Equifax, Experian, & Trans Union). This is true…HOWEVER, they do not and will never report positive payment history. These types of companies will only report to your credit if you stop paying and they send your account into collections. Do not mistake their terminology as a road-map to credit building.
- Payday Loan / Title Lenders: These temporary loan companies prey on the “subprime” lending market of underbanked, uninformed consumers, or people with poor or no credit. They may promote “low-interest rates” for their products, but push high fees that can equal out to 300% – 500% annual interest rates, and become as high as 5,000%. For record, a standard credit card rate is as high as 29%.If you cannot repay the loan in full at the end of the cycle (typically 30 days), you will be charged additional fees. Payday lending is a cycle of renewing your loan every 30 days, becomes extremely expensive, and very difficult to break. If possible, it is better to use a credit card in the event of a cash emergency…but your $1,000 Rainy Day fund can always provide you with 0% self-lending money for any unexpected event.
- Credit Repair Programs: No lender has an “advantage” or “special program” to boost your credit score rapidly, and you need to be leery of those who say they can. Good credit is created over time with excellent payment history. This is the only way.On the other side of this topic, do your research on Debt Settlement Companies who offer to help you settle your debts and rebuild your credit. If this applies to your situation, visit this LINK to the FTC (Federal Trade Commission)’s website for more info on Credit Repair Scams and this LINK to the FTC’s article on rebuilding credit yourself.
You have the right to view your credit report.
Once a year, visit Annual Credit Report.com and obtain a copy of your report from all three credit bureaus: Equifax, Experian, and Trans Union. This is an excellent time to check your report for errors, omissions, or corrections. Likewise, you can get an idea of where you may need to focus to strengthen your credit report. This website does not provide credit scores.
For more on the difference between your credit REPORT and your credit SCORE… CLICK HERE.
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