How to Obtain Credit

Stacks of dollar bills of differing amountsAt some point in your life, you will need to borrow money.  Perhaps you want to spread out the payments on a major purchase or finance a business venture.  Credit can help you get ahead, or it can put you in over your head very fast—the key is in responsibly managing any debt you incur.  But first, how does one go about getting credit, especially a first-time borrower or someone with a spotty credit history?

Many sources make money available to loan—most legitimate, and a few that are out to prolong your debt just to take more of your money.  Watch out for high-interest loans and those requiring an up-front payment from you, a sure sign of a scam.  Be sure you have read and understand the terms before you sign a loan contract of any kind.

Where to Get Credit

A bank may offer you an “unsecured” loan if the borrowed amount is small and your credit is good, or a loan secured by personal property such as your home or car.  If you join a credit union, a lower interest rate may be available.  Finance companies, on the other hand, usually charge much higher rates for loans (especially auto and home equity) to people with a risky credit rating.

If you are applying for a credit card from a bank, credit union or other company to make purchases or receive a cash advance, compare the terms of different offers and read all of the fine print.  If approved, you will be given a credit limit on the amount you are permitted to charge.  In addition to interest charges if you do not pay the balance in full and on time each month, there may be over-limit charges, cash advance fees, substantial late fees, and increases in your interest rate.  Interest charges can build up quickly if you are borrowing more than you can expect to repay.

Other types of credit include charge accounts or installment plans where you buy items on time, with interest; and rent-to-own stores where you make payments on furniture or household items for an extended time, with the option to buy at what will be a very inflated price.  On either type of plan, the item may be repossessed for nonpayment.  You could lose everything you’ve put into it, and on installment purchases the company can also come after you for the balance owed, minus any amount they were able to recover by reselling the merchandise.

Caution is especially advised if you are thinking of doing business with a "payday lender",  “money shop” or storefront lender, pawnshop or title pawn company, debt consolidator, illegal “loan shark” charging a very high interest rate, or unscrupulous home equity lender offering a loan you can’t possibly repay.  Besides the high fees, in some cases you could end up losing your home, your car or your personal property.  

Establishing Your Creditworthiness

If you have bad credit, auto dealers and other lenders may try to take advantage of you.  So that you can avoid the pitfalls and stick to dealing with reputable financial institutions, with a reasonable expectation of being granted the credit you seek and at a manageable rate of interest, the first step is to build up a good credit record.  This means having a checking and/or savings account, paying rent and utility bills in full and on time, and assuming some debt you can easily pay back.  Perhaps a family member can co-sign for a loan or provide the down payment on your car or home, while you make the monthly payments. 

Make a budget and live within your means.  Don’t bounce checks!  Make inexpensive purchases and pay credit card bills in full when they arrive, avoiding the high-rate cards and those with an annual fee.  Get a copy of your credit report from each of the three credit-reporting agencies, and follow their guidelines for disputing any information you believe is incorrect.   You are given a rating, or credit score, based on your history of paying your debts, and an unfavorable entry on your report could result in refusal of additional credit or in a higher interest rate.

If you are a student, remember that having a credit card under your parents’ name does nothing to establish credit for you.  If you are working at a college or university, you may be able to join the credit union and get a low-cost loan.  Although auto manufacturers sometimes subsidize programs for graduating college seniors or first-time buyers, beware of auto dealerships offering first-time buyer loans that carry an excessive interest rate.  And don’t default on a government-backed student loan, or use it for unnecessary or frivolous expenses that will cost you many times more, with compounded interest, when you start paying for them with your future earnings!

If you have made the decision to seek a loan, you should know that a lender is not permitted to discriminate against you on the basis of age, gender, marital status, race, color, religion, national origin, or receipt of public benefits, although it is allowable to ask you about some of these.  A potential creditor is also going to want to know about the “Three Cs”:

  1. Your capacity to repay the debt;
  2. Your character; and
  3. Any collateral or resources you may have, other than income, that could be used to back up your loan. 

 

Further Reading