CREDIT AND ITS IMPORTANCE
In layman’s terms, your credit defines the likeliness that you will fulfill your financial obligations. Your credit is your word. It is your bond. In the eyes of creditors, it’s your reputation and a defining characteristic that allows them to put a dollar figure on the amount of money they will lend to you or your organization. Just as a poor reputation may hurt your business or personal standing in a community, poor credit will damage your reputation in the eyes of banks and lending institutions.
BAD CREDIT AND NO CREDIT
Bad credit and no credit are entirely different issues, yet we can treat them in a somewhat similar fashion. No credit means you have no credit history. Your financial reputation has not been established. Bad credit indicates a poor financial reputation. You have an established credit history that has been tarnished.
BUILDING OR REBUILDING YOUR CREDIT
Whether you have bad credit or no credit, the steps to credit worthiness are basically the same. Get a lender to extend you some type of credit and make on time payments. Repeat this process over and over again until desired results are achieved. Sounds easy right? Fundamentally this seems like a very simple concept; however the reality is much different. Our lives are fluid. They are constantly changing. We have to deal with unforeseen events like lost jobs, pay cuts, medical bills and Ivy League school tuition.
DECISIONS, DECISIONS, DECISIONS
The absolute…#1… most important…cannot stress this enough… concept that will lead and guide you on your path to good credit is: sound decision making. In today’s materialistic society, it is easy to find yourself with an empty bank account and bills that are spiraling out of control. So before buying a new car, upgrading to an IPhone 4 or buying that 60 inch plasma TV that you have always wanted, ask yourself; “Do I really need this item and could I afford it if I lost my job tomorrow?” If you make sound financial decisions you can avoid many of the credit related issues that plague nearly all Americans.
MANDATORY VERSUS DISCRETIONARY SPENDING
Simply stated, this is “what you need” versus “what you want”. You need food, shelter and basic clothing. You want an Xbox, a flat screen TV and an IPad. Now obviously there are many choices amongst the “necessary” items like food and shelter. For example, you need a balanced diet. This diet does not have to include filet mignon. In addition, you need basic shelter that is not beyond your fiscal means. This does not have to include a mortgage that represents 50% of your monthly income.
Buy what you need first. If there is money left over, save it for a rainy day. If there is something that you really want but don’t need, look in the mirror and ask yourself “Do I really want this item and does this item define me?” If the answer is yes, buy a new mirror. This all goes back to sound decision making.
WHERE’S THE CREDIT?
To build or re-establish credit, someone will have to extend you credit. Unfortunately, if you have no credit or bad credit, lenders will not be throwing money at you. A little creativity may be required on your part.
Below we have listed a few of the options available to you.
- Do you have a retirement account or 401k? In many cases this can be used as collateral when applying for a loan.
- Do you own a car or have some kind of equity in your home. These can also be used as collateral when applying for a loan.
- Did you know that some utilities and/or cell phone providers may report to credit bureaus? It doesn’t hurt to check. If they do, this may help you build or re-establish your credit.
- Overdraft protection on your bank account. This works very much the same as a credit card and you can generally have your bank report this to credit bureaus.
- Credit cards for bad credit. These cards have higher interest rates and fees. However, they can be great tools for building and re-establishing credit if you make, on time, minimum monthly payments.
- Get a secured credit card. Most secured cards will report to credit bureaus and work the same as a standard credit card. The difference is that your credit line will be determined by the amount of money you provide the issuing agency to hold in escrow as collateral. In essence, if you give them $5,000 to hold in escrow, they will issue you a $5,000 credit line. You will have to make, on time, minimum monthly payments to build or rebuild your credit with a secured credit card.
- Get a Cosigner. Just make sure that you understand that missing a payment will hurt your credit and the credit of the cosigner.
- Take out a personal loan and back it with a CD(Certificate of Deposit) that you purchase from the bank.
Nobody can look into the future but we can plan for what we know. Create budgets that allow you to track and control spending on “what you need” and “what you want”. Most people are shocked by their frivolous spending habits once they start tracking them.
WHERE DO WE GO FROM HERE?
Remember; treat your credit like you treat serious promises made to friends and family members. If you continue to make, on time, payments to all creditors you will enjoy little or no fees, lower interest rates and ease of acquisition when you go in to get your next loan.