For The First Time
Are you suffering from No Credit? Do you need to Build Credit before you can buy that home you want or are you trying to get that first car loan? Well, its not as difficult as you think!
You might be thinking why do I need to build credit and why would I need existing credit before a lender would loan me money to buy a home or a car? This is a very good question! When you request a loan from a lender one of the first things they do is pull your credit report. If you have No Credit, the lender can not determine how big of a risk you are. You see, the reason a lender wants you to have existing credit is so they can see your payment history. In their eyes, your payment history with your current creditors is the best indicator of how you will repay the loan you are seeking from them. That makes sense, right? Of coarse it does but this raises the question; how can I get credit if everyone who can give me credit first wants to see the credit history I don't have?
Do you need to Build Credit? See your Credit Report to Find out!
This is where building credit comes in to play. The easiest way to build credit is with credit cards. Credit cards are also the most dangerous way to build credit! Let me explain. Going back to the home loan example, a potential lender generally wants to see a minimum of 3 traditional and open credit lines on your credit report. Usually, they also want at least one of those credit lines to be open for 12 or more months. What language am I speaking you ask? Oh, thats bank talk! I'll translate; 3 traditional and open credit lines means 3 separate accounts that are reported to the credit bureaus and are currently active and available for use. An example would be 3 different credit cards that you use and pay regularly. You don't have to have any balance that carries over from month to month and it is actually better if you don't, but you must have the ability to charge purchases to these cards! Also, the 3 lines of credit don't all have to be credit cards. One to could be a car loan and another a student loan. But you see my point, you need at least 3! Do you have 3 traditional lines of credit?
See your credit report to find out!
Some lenders will take non-traditional credit lines as proof of payment history. These would be a letter from your landlord that you always pay your rent on time. Another example would be payment history from you phone company. These are non-traditional credit lines because they are service fees you pay as you incur them. They are not a debt and therefore they are not reported to your credit report. As a result some lenders will not give you the best loan rates and options when you use non-traditional credit as opposed to traditional credit lines! Therefore, I again bring up how important it is to have 3 traditional lines of credit.
As I explained earlier the easiest way to build credit is with credit cards. Basically, to build credit you need to apply for a credit card or a few until you have 3 lines of credit.
Compare the different cards for the features they offer that appeal to you most. Those are the best cards for you! Many people would now explain the interest rates and APR rates that apply to credit cards and tell you to shop for the best rate, but I disagree! What you say, are you crazy? No, let me explain. The interest rate and APR only apply if you carry a balance on your cards from month to month. However, if you pay off the balance in full each month these rates never get charged! Nice catch don't you think? There is one rate you should note however and that is the rate the card charges for cash advances. In other words, if you get money from the ATM from this card how much will that rate be? I have found the amount I pay for these cash advances each month is less than the amount my bank charges for me to use another banks ATM! Needless to say, you need to pay off your credit card balance each and every month and this is not as difficult as you might think. It just takes some discipline. Here are the steps you need to take:
1. Don't charge something you can't pay for with cash! To make sure you abide by this you need to record each purchase you make with your card in your check register. Deduct this purchase just as you would when you write a check and that way when the credit card bill comes you have the money to pay it in full.
2. Another option is to only use your card for an expense you have budgeted. An example would be gas for your car. You have $100 dollars per month budgeted for gas and instead of paying cash you now pay with your credit card. Again make sure you track and record each purchase. At $100 stop and pay your credit card off in full when the bill comes.
3. If you just don't feel you can be disciplined enough to not charge up your card get a secured credit card. This is very similar to a debit card you would get with your bank account except this card reports payments to your credit report to build credit. Here is how it works. A secured credit card is called secure because you put money on the card you charge against. When you spend all the money you can't charge anymore. This way you can't build any debt but you do build great looking credit because no one can tell the difference between a regular credit card or a secured one!
Regardless of which credit card you choose, the benefits are the same. You will establish a great credit history and by following the advice above you will build credit. You will have open trade lines on your credit report that all show current payments and you will have zero balances. To a potential lender you will be their ideal customer! So visit our page on Credit Cards and build credit now!
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