Establish Credit

It’s easier to borrow money once you’ve established good credit.

And it takes time to establish good credit. But here are some simple rules that you can follow.


Rules For Establishing Good Credit

Rule 1: Pay your bills on time.

Rule 2: Manage the amount you borrow.

Rule 3: Limit what you borrow to what you can afford to repay.

Rule 4: Limit the number of credit cards you have.

Rule 5: Don’t apply for too many credit cards at the same time.

Rule 6: When you borrow, shop around for the best deal.


What Banks Look At And Why?

When you apply for a loan, mortgage or credit card, banks look at three things: credit worthiness, financial means and debt structure.

Credit worthiness. 
This is your credit history. It is recorded in a credit report. Banks look for a history of paying your bills on time. 

Financial means. 
This is your income. Can you afford to make the payments required to repay the money you borrow?

Debt structure. 
This is your other financial obligations. Are you living within your means? Do you have other debts? How likely are your other financial obligations to get in the way of repaying the money you wish to borrow?


How Much Will Banks Loan You?

While a bank takes many things into consideration, one of the things it considers is how well you manage your money. Use this calculator to help analyze your budget as a full-time student. This calculator is specifically designed to help students understand their expenses and income while attending a university, college or other full-time educational institution. This calculator allows you to input your expenses and income for an eight-month school year running from September through April.

To find out how banks will view your situation, check out our Student Budget Calculator.


Step-By-Step Guide To Establishing Good Credit

It’s harder for those with no previous credit to borrow money than it is for those who have established good credit. 

1. The best way to establish credit is to pay your bills on time. 

2. Often it is easier to get a secured loan than an unsecured loan. Auto loans are a good place to start.

3. Getting a parent to co-sign a loan can help you over the hurdle of getting your first loan.

4. Some companies offer what looks like a credit card but is actually secured by money you give them in advance. You are, in effect, borrowing against your own money-and paying interest to do it.

Although this is not a good financial deal, it can help you establish credit. The key here is to make your payments on time.

5. Some banks will let you secure a loan with money you have in a savings account. This is sometimes called a Passbook Loan which freezes part of your account to guarantee payment. This means your savings are not available to you until you have repaid the loan.

On the other hand, this is one route available if you are having difficulty establishing credit. Again the key is making your payments on time.

6. If you have a car that is already paid off, banks may loan you cash against the value of the car and secure it using the car as collateral, just as they do with a new car loan. Remember, you are using the loan to establish credit, so be religious in making your payments on time.

One way to insure this is to take the money you get from the loan, put it in the bank and use it to repay the loan.


How To Increase Your Line Of Credit

What if you have a credit card and you want to make a purchase larger than your credit limit? You may be able to increase your line of credit.

Many banks who issue credit cards do it automatically after you’ve had a good history of repayment.

You can also call the bank or the company issuing the card and request that they increase your line of credit. They will probably request a credit report and review your credit history. For this they will need your Social Security Number. They should be able to give you an answer within minutes.

Don’t forget, the key to increasing your line of credit is paying your bill on time.


Finders Fees And 900 Numbers

Sometimes you will see an ad with a 900 number offering to give you credit, often to “consolidate debts”-or you will find a company that requests a finder’s fee to set you up with a credit card. Usually these offers look too good to be true. They usually are. Investigate them carefully.

If you are credit-worthy, a legitimate lender will lend you money without charging a finders fee. You just need to be persistent. 

If you are not credit-worthy, someone may be willing to take a risk, but you will pay for their risk. They will charge a higher interest rate, “processing fees” and other fees and expenses to help hedge against the risk. It’s up to you to investigate what the total cost of the loan will be and decide whether it’s worth it.

You may also see ads offering to repair your credit. Beware! There is no way of getting instant good credit. Building a credit history takes time. If you question the services offered, you may get evasive answers, or statements that imply help with solving your credit problems without actually committing to any results-all for a fee. Repairing your credit is a process that can’t be short-cutted. Companies that try to charge you for repairing your credit cannot deliver what they promise.