Oh, credit rating! So important and often misunderstood. Talk about credit and it seems everyone is either sure they KNOW what they are talking about or they brush it off and say it’s not important at all.
However, when it comes to workshops and classes, credit is what people want to know about. How to build it, how to get it and how to fix it. And the best part? The answer is the same in all of those cases, at least for the most part.
People basically fall in to three groups: good credit, bad credit and no credit. There are ways to build and rebuild your credit rating, but they take time. You don’t get a good credit rating in a month or two; you need to build the payment history that is the biggest part of your credit rating.
So how DO you build credit? Borrow money and pay it back on time. Really that’s it. Pretty simple to do. Not always easy, mind you, but simple. You don’t have to borrow a lot of money, and you don’t have to carry a lot of debt, but you do need to get some credit and then use it wisely.
Let’s talk about getting credit for the first time. That can be a challenge, because if you haven’t used any credit, you don’t have a credit rating, which means you might have a hard time getting credit, which means you can’t build a credit rating…..and around and around we go! For most people, getting credit for the first time might involve another person, either as a co-applicant or a co-signer. Okay, who got their first loan on a car with their parent as a co-signer, raise your hand! (whoosh of hands going up) That’s a fairly common way to help a young person get credit for the first time, at least around here.
Some other things you can do include opening a credit card with another person as a co-applicant. Start small, with a low credit limit like $300. Make some small purchases, (something in your budget anyway, like a tank of gas or a trip to the grocery store) let the bill come and pay it in full each month. Then you won’t pay interest (in most cases) and you’ll start to build that payment history. Once you have established some credit, then you can work on getting an account on your own.
Another thing you can do is to take a SMALL loan with your savings as collateral. Explain to the bank that you are trying to build a credit rating. If you can, use a landlord, utility company or cell phone company as a non-traditional credit reference to show you have made payments on time. They may still want a co-signer or co-applicant, but if the loan is very small and you have a good amount in savings, they may take a chance on you. Some banks even have a loan type call a credit builder loan just for this very purpose.
Another option is if you have someone who will add you to an account as an authorized user. This is typically with a credit card as well. An authorized user can use the account, but has no obligation to repay. The upside is that the payment history reports on the authorized user’s credit report.
One caution about co-signers and co-applicants…your behavior affects their credit rating. Keep the relationships in mind. If you aren’t able to make your payment, let your cosigner know right away so they can make it. If Grandma co-signs for me, and don’t tell her I can’t make my payment, she’s going to be pretty ticked at me if the first call she gets is from the bank about the late payment. COMMUNICATE with your co-signers so that everyone knows what’s going on.
Rebuilding your credit is much the same, except you may have some older negative items to take care of. We’ll talk more about that next week.
If you need help either getting your foot in the door or getting back on your feet, the counselors at the Center for Financial Resources can help. Contact us for an appointment at 1-888-258-2227 or at www.lsssd.org
Written by Sylvia Selgestad, Financial Counselor and Educator
Photo credit: pixaby.com
LSS Center for Financial Resources
Consumer Credit Counseling Service | Housing Resources | Sharpen Your Financial Focus | Financial Fitness Education
705 East 41st Street, Suite 100 | Sioux Falls SD 57105-6047
605-330-2700 or 888-258-2227
Strengthening Individuals, Families & Communities