Tilted Forum Project Discussion Community - View Single Post - NoSoup's Guide to Obtaining and Maintaining Excellent Credit

NoSoup · 06-24-2005, 07:13 AM

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Originally Posted by herostar

Thanks alot! I'm 20 and about to get started building my credit. I don't really need to take any loans out for anything, so how would you suggest I begin?

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Obtaining Credit

Basically, it is usually very difficult to obtain credit when you have no credit history. The easiest ways to obtain credit would be either with a secured loan, secured credit card, or a co-signer.

Secured Loan/Secured Credit Card
Getting either a secured loan or credit card is probably the easiest way to get credit without help from others. Basically, with both a secured loan and a credit card the lending institution is lending money out to you because they have collateral. Collateral is something that is used to guarentee payment - common collateral are vehicles, homes, and funds. In most cases, these credit cards and loans will secured by funds - that is, cash you have in the bank. Generally, you will be required to deposit $X into an account with the institution. In this example, we'll use $500 as $X. Once your $500 dollars are in the account, they put a freeze on it - making it impossible for you to withdraw those funds until the account is closed or the funds are released. The institution will then issue you either a credit card or a secured loan, using those frozen funds as collateral.

If it is a credit card - secured or unsecured - never, ever charge over 50% of the credit limit, even if you pay the card off in full each month. The reasoning behind this is because potential lenders like to see that you still have funds available on your open lines of credit - that you are being responsible with it. The reasoning you can't ever do it is because the company that holds the credit card reports to the Credit Reporting Agencies (from now on known as CRAs for the sake of typing less) only once per month, effectively taking a "snapshot" of your current balances. If you are maxed out, even if the check to pay off the balance is in the mail, it will reflect poorly on you.

If it is a secured loan, although it may be tempting because it is costing you money to pay interest, don't pay it off early unless you have found a better alternative. Credit history is exactly that - history of your payments. The longer you have the loan, the better off you'll be in the long run. Look at the money you are paying in interest as an investment - maybe even the best you have ever made. With good credit, you will save tens of thousands of dollars in interest on big ticket items, such as a house.

To obtain either a secured credit card or a secured loan, I would suggest checking with your local banks or credit unions, and avoiding any cards with an annual fee. As long as you pay your balance off on full each month on credit cards, you do not have to pay any interest.

Cosigner
A cosigner is basically another individual put on the note ( oan) that is also responsible for payments. The cosigner is 100% responsible, they don't have any less responsibility than the actual borrower. If the payments are late or the loan defaults, the cosigners credit will be damaged just as much, if not more, than the borrowers. Using a cosigner will often allow you to obtain credit that you normally wouldn't be able to obtain without any other credit history. Lower interst rates, longer terms, or even just getting approved are some examples as to how cosigners can help. Having a cosigner on a note doesn't really matter as far as building credit goes, it will either increase or decrease as if you were on the debt alone.

Remember, even if you don't need money right now, I'd still start building your credit ASAP. Think of the interest you pay right now as an investment - and you don't even necessarily need to pay interest. If you get a credit card (secured or unsecured) and pay the bill in full each month, you won't have to pay any interest.

Hope this helps!