Becoming a Good Risk
Paying cash for products and services seems to be a practice that occurred in a different era.
Today, credit is a way of life, and plastic has evolved into the currency of choice.
Virtually anything--gas, groceries, doctors' visits, clothing, vacations, even cars--can
be purchased with credit cards.
Yet many consumers are unclear about the best way to go about establishing and maintaining
a good credit history.
What Creditors Look For
Creditors are in business to make money and avoid losses. Typically, creditors will analyze the
information provided in your credit application and will access a credit report from one
or more of the 3 major credit bureaus, Experian, Equifax, or Trans Union.
When deciding whether to grant credit or a loan, creditors will consider a number of
different factors, such as your income, how long you have lived at your current
address, what kinds of assets you have, the balances in your checking and savings
accounts, your promptness in paying bills, how long you have been working for the
same company, and how much you owe other creditors.
All creditors have slightly different criteria, and they will make a judgment about
the creditworthiness and potential risk of each applicant.
How to Establish Credit
There are a number of ways to establish credit. If you have a steady income and have lived in
the same area for at least a year, try one of these approaches:
- Apply for credit with a local business, such as a department store or a local bank
or credit union. These local merchants may have lower credit standards than larger
- Apply for credit with an oil company or local department store.
- Take out a small loan from a local bank or credit union--even if you have no immediate need for the
money. Make payments on time and consider the interest expense an investment in
establishing a good credit history.
- Take advantage of
secured lines of credit offered by some lenders. By depositing a specific amount
into a special account, you receive a credit card with a limit that equals your
deposit. (For example, if you deposit $1,000, your credit limit will be $1,000.)
- Before you apply for credit, make sure the creditor or lender reports
credit history information to one of the credit bureaus so you can build your
Pay Your Bills on Time
Although creditors have different criteria
for granting credit, there are a number of actions which most creditors rank as
indicative of a poor credit risk, including:
Paying your bills on time is the best way to maintain a good credit rating and be considered
a good credit risk. However, there are a number of legitimate circumstances which
can cause you to become behind in your payments, such as illness, injury, or the loss
of your job.
- Frequent late payments
- Unpaid bills
- Accounts turned over to a collection agency
- Legal judgments
Talk to Your Creditors
If you begin to fall behind in your payments, contact your creditors immediately.
Most are willing to work out an alternative payment schedule with you if you expect
to repay your loan or balance within a reasonable period of time.
Creditors and lenders want to collect their money at the least possible cost. By
working with you before the situation becomes critical, they can save time and money
on collection efforts, and they know up front when to expect payment.
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