Virtually everyone faces the need to borrow money at some point. Think about it, when you purchase a home or vehicle, you’re doing so through a loan. Even financing a new washing machine and dryer generally requires some type of loan. Whether it’s through a credit card or personal cash loan, there are various ways to borrow money to put toward the purchase.
Borrowing money isn’t necessarily a bad thing in its own right – in fact, it’s a often a necessity. Why is this the case? Well, very few people have enough cash on hold to just run out and buy a new home, the full spectrum of home furnishings, a couple of high-end vehicles and all the other elements we strive for throughout our lifetimes. Loans bridge the gap.
Of course, in order to be able to take out loans like these, you have to have credit. Though existentialists might argue this point, your ability to get anywhere in life revolves around credit in one way or another. It’s an intricate field, but understanding it can be an immensely valuable tool in your journey through life.
If I Need To Borrow Money, What Exactly Is Credit and How Is This Linked?
Credit is defined as “the capacity to obtain goods and services before paying for them”. This leads on from the understanding that the goods or service will be paid for in the future. Three basic types of credit exist:
- Revolving: Revolving credit covers credit cards and other types of accounts in which you’re given a set amount of available spending and you continually make payments toward an ongoing balance.
- Installment: Mortgages, vehicle and personal loans and store financing fall into this category. You borrow a certain amount and make monthly payments toward that fixed amount, eventually paying it in full.
- Open: Open credit entails ongoing payments that’ll never really be paid in full. While just about any expense may seem to fit this description at times, open credit actually includes electricity, water, heating fuel, mobile phone and satellite services amongst other utilities.
Either way, you borrow money from lenders who trust you’ll pay it back. Since trust only goes so far, they like to fall back on some very important resources at their disposal: credit reports and scores. These tools help them determine just how much faith they can place on you based on your financial history.
What Goes into a Credit Report?
Your credit report is a detailed account of your borrowing profile. Each credit account you open shows up in your report along with the date it came into being, its type (mortgage, auto loan, credit card, etc.), beginning balance or spending limit, payment history and current amount owed as well as certain other details.
Mortgage and automotive lenders, credit card companies and other creditors send information to reference agencies. Here, the three primary options are Equifax, Experian and Callcredit. When you apply for a new loan of any kind, the potential lender checks with one of these agencies to find out just what type of borrower you are based on information from other creditors with which you have accounts. Credit reports also give rise to credit scores.
Where Do Credit Scores Come from?
Your credit score is basically a grade on how well you’re holding up to the test of borrowing. Each credit bureau has its own scoring system, but they’re all fairly equal. For the most part, scores can range anywhere from 300 to 900 and are broken down into the following categories:
- 300 – 550: Bad
- 551 – 649: Poor
- 650 – 699: Fair
- 700 – 749: Good
- 750 – 900: Excellent
When determining your personal credit score, these agencies look at how many accounts have been opened in your name, how timely your payments have been, how much you owe, whether or not you’ve left any outstanding balances with creditors, any defaults you have on file and a number of other aspects.
Scores are also dependent on the types of credit you have. Creditors and reporting agencies like to see diversity when you’re looking to borrow money. Several different store accounts on their own probably wouldn’t boost your score very much even if they’re all active and up-to-date. Along those same lines, having all your credit stem from credit cards wouldn’t work in your favor.
Having a well-rounded profile consisting of, maybe, a personal loan paid off some time back, a mortgage, a vehicle finance and a credit card, all of which have been tended to promptly, could paint a credit-worthy picture of you in the eyes of potential lenders.
Obviously, a low score tells lenders you’re not very adept at paybacks when you borrow money. We all know that’s not necessarily the case. Everyone faces hardships and unexpected issues. Unfortunately, the numbers tell who, what, where, when and how but fail to explain why. Of course, most creditors aren’t really interested in why.
When it comes to establishing credit, there’s no profound secret to success. You just have to borrow money. Of course, that’s often easier said than done. If you’ve yet to establish any form of credit, you do have a few options.
Secured Credit Cards:
Secured credit cards are meant specifically for those who have little to no credit under their belts. They typically come with low spending limits and higher-than-average interest rates. Users are generally required to pay an upfront deposit on these types of credit cards as collateral. They’re designed to be used on a temporary basis until you’ve built up enough history to transition to other options.
Personal Loans for First-Timers:
Most lenders aren’t willing to extend a generous hand to those hoping to borrow money for the first time, but there are a few exceptions. Some offer loans designed just for first-time borrowers looking to establish credit. With this unique alternative, you’ll borrow a specific amount of money and make payments on your loan, but you won’t actually receive the borrowed sum until you’ve paid off the loan.
In many cases, lenders are a bit less cautious with newcomers to the credit world if they have the backing of a more established borrower. Co-signers are held responsible in the event that the borrowers fail to repay their loans. This gives the lender an extra layer of security. Parents tend to be the go-to co-signers for many borrowers, but anyone with a favourable credit score can technically fit the bill.
Any of these options, or perhaps a combination of them, would be great ways to kick-start your credit as long as you use them wisely and make payments on time. Otherwise, you could ruin your credit before it even gets off the ground.
My Credit Score is Good: How Can I Keep it That Way?
If your score falls into the good to excellent range, you’re in better shape than about half of the population. Keeping it under control is the key to being sure you can always borrow money when the need arises. Some methods you can use to maintain your score include:
Keep Making Your Payments on Time:
The biggest reason for falling credit scores these days is late payments, and a delinquency of even a few days can have a negative impact. Mark your calendar or set alarms on your phone to remind you of when each of your payments will be due. If the automatic draft option is available through your bank, take advantage of it. Just be sure you leave enough money in your account to cover those bills.
Keep New Accounts at a Minimum:
In the credit world, more is often better. However, moderation is crucial. Opening an occasional new account can help keep your profile from going stale and your score from dropping as a result, but don’t start up several new accounts over a short span of time just for this purpose.
Pay off Some Debt:
If you have the extra funds to pay off some of your smaller balances, do it. Your debt-to-income ratio factors into your credit-worthiness in many cases. Therefore having fewer bills to pay each month will look good on your record. Paid-off accounts show up on your credit report for several years after the fact, so you’ll still get credit where it’s due, so to speak.
First and foremost, keep a close watch on your credit history. You can request one free copy of your report from the top reference agencies each year. Use these to keep tabs on your status and score. Furthermore, make sure no errors are there to negatively affect your history.
Bottom Line When Deciding How to Borrow Money
Getting ahead in life and even getting through the tough times typically requires loans. In order to borrow money, you need a solid credit history. Establishing this form of backing and maintaining it may not be easy, but it’s certainly not impossible.
Take advantage of secured credit cards, first-time loan options and other available resources to build or rebuild your credit. Make payments on time, stay away from excessive new accounts and always keep watch over your credit report to maintain a suitable credit score once you have one.
If you happen to need a little extra help along the way in spite of your best efforts, MoneyBoat is here. We offer a range of loan options designed to meet a number of different needs regardless of your current credit standing.