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How to Establish Credit

Credit is an important part of our lives. Unfortunately, obtaining credit can be difficult if you have never had credit before, or if you have had credit issues in the past. Before creditors can lend money to consumers, they must be sure individuals can repay the funds provided. In other words, they try to determine whether or not the applicant is creditworthy.

The following information is used to find out if an applicant is creditworthy:

Disposable Income
You can determine your disposable income by subtracting all of your expenses (e.g., rent, utilities, gas, etc.) from your monthly income. The disposable income helps the creditor determine whether or not an individual is able to take on additional debt.

Assets Owned
Lenders will look for any type of assets owned by the applicants, such as checking or savings accounts, insurance policies, valuables, etc, which can be used as collateral.

Debt Management
How does the applicant manage debt? Does he/she have any credit cards or other types of loans? What is his/her payment history? In nearly every case, the creditor will obtain this information from a credit report.

Residence History
Lenders look to see how often you move and whether you rent or own a home. It pays to have a stable residence, and owning a home (even if jointly with a spouse) is better than not owning a home.

Employment History
Stable employment is a key component to a creditor lending money, especially when it comes to lending to first-time borrowers. A person’s ability to hold a steady job will improve his/her chances of getting approved.

Utilities
Even without a credit history, it is possible for an individual to sign up for utilities in his/her name. When an individual has his/her name on any type of utility, it won’t improve the person’s credit score, but it can be helpful to a first-time borrower.

Let’s say you just started working, or you work out of your home. Or, what if you have always paid for things with cash, or you do not have many (if any) assets in your name? How do you establish a credit history?

The following is a sure fire way to establish credit in your name:

  1. Open a savings or checking account at your financial institution. Your ability to manage a savings and/or checking account over a period of time will demonstrate that you can handle this type of responsibility.
  2. Apply for a loan. Many say they cannot obtain a loan because they don’t have credit, but that is not necessarily the case. You should consider applying for a credit card from your financial institution, a department store card (which is easy to obtain), or some sort of secured credit card (credit limit is tied to your savings or other funds). Just remember that each card comes with its own group of expenses and you should treat them with great care. Do not use these tools as “free” money as you must show responsibility in the repayment of any debt you have on the card. Be sure to ALWAYS pay your debt on time!
  3. Become a co-borrower. In most instances, you can co-sign on a loan, which means that you share in the responsibility of making loan payments. Usually, an individual can co-sign with another party who has established credit, such as parents co-signing for a child for his/her first car. A person can then develop a positive credit history by making loan payments on time, without as great a risk to the creditor.

The key to establishing credit is to be patient. You must show consistency in money and/or credit management over a period of time. Start slowly, be cautious, keep track of your debt, and repay your debt on time. Over time, you will not only establish credit, but develop a good credit record for your future.

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