For the last few months I have been working with numerous other Rent-to-Own companies to help them qualify either potential tenant/buyers and/or potential investors.
One problem I have been coming across specifically is the lack of credit. Too much credit can cause just as many problems as no credit or lack of credit.
Some people are in the enviable position of paying for every purchase with cash. This is great – except for when it comes to establishing credit. The strength of your credit history determines if you qualify for a car loan, mortgage or even credit card and also at what interest rate you will pay.
Lenders will use credit reports and credit scores to quickly assess an applicant’s creditworthiness and to check their credit history.
For new or young borrowers or even borrowers who suffered damage to their credit and are now scared to have any credit, however, this poses a serious catch-22: How do you qualify for credit without a credit history, and how do you rebuild a credit history after it has been damaged.
Step 1 – CHECK YOUR CREDIT RATING
Credit bureaus will open a legitimate credit file in your name when a creditor (bank, credit card company or other lender) reports that you’ve had an active credit account for at least six months. All borrowers, not just first-timers, are encouraged to check their credit reports at least once a year and scan them for errors. Mistakes can damage your credit score for years — up to 5 years for negative information like late loan payments and 7 years for a serious default like bankruptcy. If you find a mistake, contact the credit reporting agencies immediately and have the mistakes corrected.
Step 2 – PAY YOUR BILLS ON TIME
Whether it is a credit card, utility bill or any other type of bill, get into the habit of paying your bills on time. While your utility bills are not recorded on your credit bureau, lack of payment that goes to collections, is recorded and that can affect your credit score and your ability to get a good interest rate on a credit card.
Step 3 – GET A CO-SIGNER
Most lenders will allow someone with an established credit history to co-sign the credit application with you. This can include your parents, older siblings or family friend. As with any financial transaction, you should be careful when co-signing for credit. First of all, make sure that your co-signer actually has a good credit history. If your older brother tends to exaggerate, don’t take his word for it. In the eyes of the lender, you are only as good as your brother’s credit score, so ensure that you see it in writing and you can only get that through their credit bureau report.
The most important thing to understand is that co-signing for credit means that both parties are now responsible for its timely repayment. If your dad co-signs your credit card application and you run up hundreds of dollars in late payment fees, both of your credit scores are going to take a hit.
Step 4 – START WITH A SECURED CREDIT CARD
Secured credit cards are a great way to establish credit or even rebuild your credit, when it has taken a hit. Unlike regular credit cards, secured credit cards are tied to collateral in your bank account. In other words, your credit limit equals your checking account balance or another amount required by the card company — although payments for purchases made with this card won’t be drawn from your bank account. If you have $500 in the bank, then your credit limit for the card is $500. If you try to charge more than $500 on the secured card, the transaction simply won’t go through.
Be careful of the distinction between secured credit cards and prepaid credit cards. Prepaid cards are not really credit cards. They’re actually debit cards in disguise. Because it’s not real credit, your activity on your prepaid card won’t be reported to the credit bureaus.
In addition, some secured credit cards carry higher interest rates and fees but with good history, most lenders will let you graduate to an unsecured credit card, which will increase your credit limit and help you establish a better credit rating.
Step 5 – APPLY FOR A SMALL LOAN
A loan is also known as installment credit, since you pay back the loan, with interest, in set monthly installments. A mortgage or a car loan is a good example of installment credit. If you want to make one of these major purchases someday, it’s a good idea to show lenders that you have some positive experience with installment credit.
Student loans are just one type of installment loan. Banks and other lenders allow you to take out small loans for just about anything: a used car, an appliance, a vacation or even a personal loan.
Where most people get in trouble is when they cannot make their monthly installment repayments, which in some cases leads to bankruptcy. It is important to remember to only borrow what you can repay.
Step 6 – GET A GOOD JOB!
If you apply for a mortgage, salary history is one of the most important considerations that lenders will make. Usually, you’ll be asked to supply income tax forms for the past two years and current pay stubs as proof of your earnings.
When lenders examine a borrower’s employment history, they’re looking for stability. If you’ve been at the same job for years and your salary has continually risen, then you’re a good prospect for credit. If you constantly jump from job to job and your salary has been erratic, that puts you in a less desirable position for lenders.
Your employment history is also a good indication of your capacity to repay credit. A person with a low average annual salary wouldn’t have the same capacity to repay a large credit card balance than someone with a higher salary.
Step 7 – DON’T MESS UP!
One of the best ways to build good credit over the long term is to avoid the small and large mistakes that can stain your credit report for years.
Pay all of your bills, loan installments and credit card payments on time. Not only will you pay a fortune in late fees, as most credit cards charge over $30 for late payments – but lenders will raise your interest rates for future credit.
Avoid bankruptcy at all costs; it’s the credit equivalent of death. Bankruptcies will mar your credit report for 7 years. Keep in mind that letting a debt go into collections is just as damaging as it also stays on your credit report for 7 years.
Establishing your credit can be done with due diligence and also making regular payments on time. Rebuilding your credit can also be done after it has been damaged – make sure to take great care and seek advice if you are unsure about the necessary steps. It will be time well spent!
You can read more about it here at Office of Consumer Affairs – Government Agency http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02178.html
Amina Mohamed is a Mortgage Agent and Real Estate Investor who believes in helping other investors look at all of their options when it comes to finding a mortgage. She writes a weekly blog on her own website and for other investors as well and is keen on helping people fix their credit issues so that they too can become homeowners and possible real estate investors. Amina can be reached through her website at https://www.aminasmortgageservices.ca or on Facebook here or on Twitter here