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3 Simple Steps to Building Credit


Step 1: Get a job and stable residence.
Your employment status doesn’t directly impact your credit; but you can’t repay a loan if you don’t have income, and timely repayment is a key factor in determining your credit rating. Having a steady income is a prerequisite to getting a loan and building credit. Lenders usually want to see a year or more on your current employment or two to three years in the same line of work. Stability at your residence is also important to lenders. Moving around frequently or staying with family or friends doesn’t really reflect an ability to make payments on time for rent or to utility companies. Some lenders will require proof that you live where you say you live and that you’re up to date with all your residential responsibilities.

Step 2: Borrow money.
Apply for an auto or personal loan with a local finance company or try opening a nationally recognized credit card. Once you have a job, verifiable residence and you’re 18, you can apply. Establishing the very first credit account can be hard, but there are some tried and true methods like having a reasonable down payment for an auto loan or applying for a secured credit card or having a qualified cosigner for a small consumer loan or merchant account. Your bank or credit union is usually not a good place to start, due to their strict lending guidelines. It is better to only apply to a few select credit accounts; lenders also look at the number of credit inquiries you have to determine if you already have or are trying to have access to too many credit accounts.

Step 3: Pay and wait.
Once you have an account in your name and you make your payments on time, you begin to build your credit. Your loan or credit card company will report your account history, good or bad, to one or all of the three major credit bureaus. This monthly credit reporting establishes your credit report so it’s really important that all your payments are made on time. After your account has been active for six months or longer, a FICO score can be generated based on your credit report. This is the score that lenders use to grade your credit, a higher score will get you lower interest rates and better repayment terms, a lower score usually means higher interest rates or even being denied credit all together. At first your score may be low, since you’re just starting out, but it will increase as you continue to use your credit wisely. Be patient because it does take a little time to prove you’re responsible and to build your credit.

Also, following two basic rules will help you build a good credit history.
First, pay your bills on time every month, even those that aren’t listed on your credit report. Missing payments will hurt your credit building efforts and lead to a bad credit score which can be expensive to fix and take years to repair in some cases.
Second, only borrow what you can afford to repay and only when or if you really need it. If you take on more than you can handle, you may have trouble making payments and if you fall behind, you can destroy your credit rating. What you can afford to repay depends upon your income and expenses. The generally accepted safe rule is to keep your income to debt ratio at fifty percent or less of your total income.

Please feel free to contact us directly if you have any specific questions concerning applying for credit with Consumer Financial Services. Please see our “contact us” page for contact information. Thank you.

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