Get Financially Fit! | Establishing Credit
Posted: September 21, 2016
Building Trust With Lenders
By Cody Nyhagen, Teller
WESTconsin Credit Union
How do we buy houses, vehicles, and other high priced necessities in life without having enough cash to cover the cost? We buy them using credit which is a way of borrowing money from a bank or finance company so that you can have what you want now and pay for it later. Now that being said, not just any financial is going to borrow money at any risk. Over time you build credit which essentially means that you build trust with creditors, or the people you owe money to. We all have to start somewhere with credit, and one of the most common ways of doing so is developing a payment history by taking out what would be considered a “credit builder loan”. Involved in that credit builder loan are secured funds that help establish or boost a credit profile because payments are being made and interest is being paid as well. That brings up another common way of building credit. The use of personal credit cards is a good way to build credit if they are used responsibly. Credit cards, up to a certain amount, allow you to pay right away and make some or all of the payment later. Now, credit cards are good resources to refer to but they must not be abused. With credit cards, they typically have a higher interest rate on them then credit builder loans, and even most personal loans. I have mentioned interest a couple times now, so for any of you that don’t know, interest is the money paid regularly at a particular rate for the use of the money lent. That’s where financials and credit card companies make their money is the interest, or money charged, on lending money to individuals.
The benefit of having a good credit history and using credit in a responsible way, is receiving that lower interest rate and gaining that trust for future creditors. When you finally approach the stage of buying a house or whatever the desire may be, they review your credit history while deciding if they want to grant you the money or not. A side note going forward, is that when you have what’s called a “down payment” on the item (ex: house or car) you are looking to buy, it increases your chances of getting the loan. This way lenders see that you have money invested into it already. On the opposite end of the spectrum if you have not taken the time to build credit, developed an unstable payment history, or were unable to pay back on a loan, that will reflect upon your credit report and decrease the chances for future loans.
A credit report includes your credit score which is a number calculated by a credit bureau. That calculated number is based off of five areas that include: Payment history, amount you owe already, length of credit history, new credit you’re in the process of or looking to acquire, and the types of credit you have used. The higher your credit score, the more likely you are to be granted a loan. Not only does it help make decisions on loans, it helps generate the interest rate that is associated with that loan.Having good credit and establishing that trust with financials is rewarding in more ways than one. It plays a huge role in everyday life such as switching cellphone companies, renting, insurance, and some employers are even starting to review credit. Lastly, it saves you money in the long run whether it be emergency situations where you need a loan or you’re simply looking to purchase your first mortgage.