Sometimes people live debt free by having a steady financial flow and feel more comfortable paying cash for their items like cars and renting so they do not have to borrow and owe money to lenders. Yes, this keeps them out of debt. But is being totally debt free a great idea? Not really. There is such thing as positive debt, like car payments, mortgage payments, and having a credit card.
This type of debt helps credit. How is that possible? It shows that you are reliable and responsible enough to make those payments and financially stable enough to commit to such loan agreements.
What can happen when you do not have credit?
When you do not maintain positive credit, you will be faced with problems getting a loan when you might actually need one the most. For an example, imagine a debt free life where you only pay cash for large item and you rent an apartment thus never having to pay a mortgage. Years pass and you decide you would like to open your own business. Not many people have that kind of cash on hand, so naturally you want to take out a business loan to get started.
Chances are, you going to have a really difficult time find a lender to grant you that kind of loan because of your credit history, or lack thereof. You might think, “I am debt free and have no outstanding financial difficulties on my credit report,” but that is not the case. Having no credit is almost the same as having bad credit to most creditors and lenders. Credit is built to show your financial responsibility and capability. Should you have no credit, there is no proof or reinforcement that you are able and responsible to make such a financial commitment.
If a lender of creditor cannot look at your credit history and judge you by it, they consider you high risk. It might not seem to be the fairest way to judge a person and their financial responsibility and capability, but unfortunately this is how the lending world works.
When to establish or good credit and how?
It is best to establish some sort of credit in the formative years, before you are 25. You might not even have a job yet, but during college, you can start your credit history by simply having a credit card. It will only be for credit purposes only and should be treated as so.
Be responsible and do not abuse it, as it will result in credit abuse and you will be paying for it a long time in more ways than one. Your credit will suffer and you will be in worse shape that having no credit.
In addition to being young and never having credit, there are other situations that are ideal in establishing or reestablishing credit. Some of these would include not only being of a younger age, but perhaps you pay cash for everything to avoid a past history, you are trying to start your credit record slowly, or you just think most attractive credit reports are the ones that are debt free. Keep in mind that creditors and lenders will forgive some past credit mistakes and like to see evidence on your report of positive active credit.
Whether you are establishing good credit or simply trying to start over on your credit from past mistakes, it is always important to remember that it takes time. Good credit is never a shortcut, so being patient is key. There are several ways you can get the ball rolling quicker though.
For instance, you can start your credit by being a part of a friend or family member’s good credit. If they have good, established credit and your trust, you could be a cosigner a credit card and even if you never used it, it would start your credit as well. A little risky for the person with the credit, but lucky for you if you know someone well enough that would be willing to help you out with exceptional credit.
Make sure that you trust their spending and credit habits as well, since their balances and payment history are likely to appear on your credit report.
If you are able, you can also get a secured credit card for yourself.
A secured credit card is offered usually by a bank when you are depositing funds to secure the credit. For an example, if you deposit $300 dollars, you would have credit up to $300. This way, you can gradually increase your credit, but still not charge or use credit that you cannot pay for.
With a secure credit card through a bank, you will have the funds to back it up. One thing to keep in mind when getting a secured credit card is to ask your bank if it will show up on your credit report as a secure card. If it will, pass on getting one.A ‘secure’ card can do damage to you credit. Getting a credit card can be simplified and easier to obtain from retail stores. Jewelry stores, appliance stores, department stores, etc. will often offer these cards without considering your past credit history. If you can be responsible with one of these, they can be an easy way to establish credit.
Establish your credit and keep it active!
After you have decided which way is best for you to establish your credit record, it is also important to keep them active. Sometimes when you have inactive accounts, creditors or lenders see this as a way of avoiding existing debt you might have incurred. Paying your balance is important, but also maintain a balance. It will show that you can use the credit while also paying for it.
Always pay on time, that is the number one thing that is judged first and foremost by other creditors or lenders. Remember, there are some forms of credit that future creditors and lenders might never see, so be resourceful in choosing ways to establish.
For an example, if you borrow money from a friend or relative, you might be able to pay that loan back on time and you do so, but a creditor or lender would never see or know that because it is a private dealing between you and the person.
Simple, routine payments, like rent or utility payments may not be reported to a credit agency as well. A rule of thumb whether you are establishing credit is to always do your research before applying for any type of credit or before accepting any type of credit offer. Ask the lender, creditor, or business whether the credit will be reported to a credit agency. This can help save you from taking out credit that is not needed or will perhaps be frowned upon by future creditors and can also help in distinguishing between positive and negative credit.