true adventures in money hacking

Saturday, October 17, 2009

Establishing Credit

What Lenders Look For
Before creditors lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information, which they obtain from your credit report, a computerized profile of your borrowing, charging, and repayment activities.

1. Income & Expenses

Lenders will look at what you earn and your regular expenses, such as rent, utilities, food, and other ongoing items. The amount left tells them whether you can afford to take on additional debt.

2. Assets

Do you have assets that can serve as collateral? Lenders will look for things like bank accounts, insurance, and valuable items such as a house, if you own one.

3. Credit History

How do you manage debt? If you have credit cards or have borrowed money before, you have a history that shows prospective lenders whether you are creditworthy by revealing details about the amount of debt you already have, how many credit cards you have, and whether you make payments on time.

It's easy to qualify for credit if you have a good credit history, but what if you have never used credit before? This is a common problem for people who just started working, those who work in the home, people who always pay in cash, and those who do not have assets or accounts in their own names. For them, the first step is to establish a credit history.

How to Establish a Credit History
Begin by opening an individual savings and checking account in your name. Over time, your deposits, withdrawals, and transfers will demonstrate that you can handle money responsibly.

Another easy way to establish credit is with utility bills. Having one or more utility bills in your name and paying them in full and on time will add to your credit score. Even cell phone bills work.

You could also apply for department store and gasoline credit cards, which generally are easier to obtain than major credit cards. Keep in mind that if you are repeatedly apply for cards and get denied, it will lower your credit score, so if you're denied more than twice, get a copy of your credit report and find out why before you apply for any other cards.

Once you get a credit card, an easy way to establish good credit is to just put a few purchases on it, and pay it in full at the end of the month. Do this for several months, et voila! You've established good credit.

See also: Credit Cards main, Choosing a Card: What to Look For, Credit Scores