April 24, 2012
Spring is just around the corner in the south and here at Sterling Finance Company we are very interested in new growth - yours! Getting started with credit can be confusing but we’re here to help you get your credit growing so you can build a better life for you and your family.
People come to credit in different ways and at different stages of their lives. Many people need it immediately out of school and hence building credit from scratch is often thought of as one of the trials of young adulthood but there are plenty of adults that simply live without incurring debt until later on.
Whatever your road to needing credit, the sticky situation seems like this:
If I need credit to build credit...and I have to build credit to get credit...how do I ever get credit?
The secret? You have to start small. It’s a not a quick process that you can skip to the top of. You have to prove your creditworthiness one step at a time and eventually you’ll find yourself at the top, looking back at what you’ve accomplished.
Reliability. Being worthy of credit means that you have convinced a lender that you are reliable and can be trusted to pay back what you borrow. One of the general requirements to open a line of credit is reliable income flow or a very full savings account that acts as a financial buffer. This should be the first step - stabilize your income or financial assets as much as possible so that lenders can see you’ve got the means to pay them back.
Accounting. Get the accounting tools you need. Having $10,000 stuffed in socks in your closet doesn’t help you, you should have savings and checking accounts so that there is a record of your assets and a banking institution that your potential lender can contact to verify the reality of your assets with, making lending to you less risky for your lender.
Proof. Don’t be surprised that as a first time borrower, you may not get very good rates because you are a risk to your lender, who has little proof, if any, of your long-term creditworthiness. Apply for a small line of credit to improve your chances of actually getting it. Going from 0 to 1,000 mph in no time flat in a vehicle isn’t likely to happen, neither is going from zero credit to opening credit lines of more than 1,000 dollars on your own without substantial proof that you can afford it.
Often, banking institutions with which you have accounts, such as checking or savings accounts, have credit cards of their own to offer to you with a small initial limit, usually at or less than $500 for brand new borrowers without major financial assets. Some banks or credit unions will even allow you to use the money in one of your accounts as collateral - essentially, they know you’re good for the money because it’s in your account.
Another line of credit typical among first time borrowers is financing for a car. It can be difficult to find financing for the fanciest car on the lot, but if you have a reliable income stream and find a vehicle whose payments easily fit into your budget, you can often get credit (though not necessarily the best rates) to kick off your credit adventure by purchasing a vehicle.
Some people are very fortunate and have someone with excellent credit that trusts them enough to take a risk on their behalf. They’re called co-signers. People without credit who want to get started on building their credit with a bang can have people with great credit co-sign for them (share the financial responsibility for the loan) as a type of “proof” that the lender will get their money back, making opening a line of credit for you less risky for the lender, since your co-signer is sharing the risk.
Once you get the reliable income or substantial savings buffer, and once you leverage these assets to open your first line of credit, it is essential that you do the following:
Use your credit. Simply having it doesn’t do much for you, you have to make purchases with it and pay back what you use to create a record, the all-important proof, that you can responsibly use your credit - allowing you to get and use more of it later.
Pay on time. This cannot be stressed enough. Late payments dramatically affect your credit score for the worse because your lower credit score reflects that you are not being responsible with your line of credit and makes it harder to get and use more of it later.
Don’t try to rush your credit. If you apply for too much credit too fast, which is called overextension, you can be denied because the potential lender doubts you can pay them back. Such denials can lower your credit score, like getting a bad recommendation from a boss who fired you - reflecting poorly on you as a borrower, making it harder to get and use more credit.
Don’t declare bankruptcy. Some people think that if they get in trouble with debt that they can wipe the slate clean by filing for bankruptcy. This is not true. Bankruptcy is, in financial terms, ultimate failure and will loom on your credit record for years. It does not clean the slate; it digs you a brand new hole to climb out of, worse than starting from scratch with no credit at all. Do your very, very best to avoid bankruptcy if you’re worrying about debt and the health of your credit.
Many people with new credit who are trying to build it responsibly will come up with plans for how to exercise their credit within their budget. Some good examples are:
Groceries. By purchasing only groceries with your credit card, you will know there is only one source pulling money from your credit line and it will be easier to keep track of and pay off each month.
Leisure. Some women like manicures. Some men like bar tabs. Vice versa. As long as you know that your monthly budget on leisure activities does not exceed your credit limit, use your credit to pay for these purchases and pay them off on time.
Vacation. Take the maximum limit of your credit line to go on a mini vacation and pay it off in increments in the months following. You’ll carry a balance but you’re still using your credit.
Try getting two small lines of credit and use one for plans like those listed above and keep the other in case of emergencies. In the event you need it, you can use it and then pay it off in increments like the vacation example, but your credit will be improving instead of worsening from collectors who claim against you (aka: your credit) for unpaid bills from your emergency.
Whatever your current situation, getting your credit growing from scratch is all about starting small, playing safe, and putting all your financial efforts into reliability in order to prove and improve your credit worthiness.
For ideas on how Sterling Finance Company can help you start growing, continue building, or even rebuild credit standing that you’ve lost, please contact your nearest branch to speak with one of our lending experts today!