As a retired banker I realize it has always more difficult to get a good credit rating started because you may have little or no credit or maybe some credit problems hanging around from your college days. This will give you an almost certain solution and help you start building some savings as well.
Many times first time car buyers or those people with little or no credit history (known in lending as “ghosts’) find it difficult to make larger purchases without co-signors or high interest rate penalties. The lenders are always looking for a credit history that shows good consistent paying habits. Their criteria also weigh other factors too.
- How long on your current job: Each lender has an idea of time but usually like 1 year or more.
- Stability: This means have you been changing jobs often and moving from address to address.
- Ability to pay: Do you have enough income to cover recurring expenses and any new loans requested.
- Character: These days many lenders may search you out on Social Media for this assessment. This can also be gleaned from your personal references or their own personal knowledge.
- Paying Habits: If you have any credit history, how was it rated.
- Credit Score: Scoring agencies assign scores based on credit history that are considered heavily at times.
There are other factors considered also. You may have to clear any small outstanding collections first. If you are requesting secured loans such as an auto loans, new home, expensive furniture or office equipment, the amount of your loan request is weighed against the amount of cash you have to put down and the value of the item after you take it home. In other words, do you have an investment in this transaction that gives the lender confidence you are not looking for free ride and intend to stay the course? Other factors are usually unique to special situations and don’t call for discussion here.
Let’s look at someone who needs a credit rating and has little to show regarding the criteria listed above. I am going to share a solution that works with many banks and credit unions who will report your rating to all the right credit agencies. This is what you want to happen if the purpose is to get good credit established.
Scenario:
- Approach any bank or credit union lender with this proposal. Ask them to lend you an amount ($500-$1000) that you can demonstrate the ability to repay in 12 to 24 months from your verifiable income.
- Ask them to then put this money in a savings account in your name to be locked from withdrawal and used as security for the loan and released upon final loan payment.
- Most often the loan rate for this kind of arrangement is very low and this interest charge represents their only real loss exposure. They have their loan secured by the same amount of money you are requesting.
- As your loan pays down, their exposure is virtually nothing since your loan balance will soon drop below the savings balance after just one or two payments.
There are some things you must then do to develop a good credit rating, they are:
Make your monthly ahead of the scheduled time. This demonstrates a strong desire to be on time and keep your commitment.
Always pay in person. Take time to say hello to the lender/loan manager and get to know the tellers. Developing a relationship in this way is beneficial and will help you later. It is almost like becoming a friend or at least a very familiar face. Relationship is vital when you are ready to do something bigger and more traditional.
Never be late on your payment and do not set up automatic payment withdrawals, even if this is an option. You want to display your ability to track and manage your finances. Auto-Pay can be used once you are well established if you desire.
Do not pay off early. Creditors are looking for your paying habits to be demonstrated over time. Even if you hit the lottery, continue your regular payment schedule. If you have a 24 month loan schedule, paying it off in 22 or 23 months would be fine but no earlier.
If practical to do so, do not change your address, job or start any other substantial credit.
Once this loan has been released you will have accomplished three important things:
- You will have a great credit rating visible to future lenders.
- You will have developed a relationship with your financial institution and the staff.
- And behold! You have a nice savings account that belongs completely to you.
Remember that credit is only a tool and should be used sensibly. Once you have a good credit rating, you will find credit card and other offers in your mailbox regularly. You would be wise to only use one at most and then try to get in the habit of clearing the balance every month to avoid interest charges altogether. A better alternative might be a debit card from your favorite lender with a small over limit allowance for emergencies. The lender you just paid off would be a great choice.