There are many opportunities to start establishing credit for you. Some people have no problem applying for a credit card or signature loan from the beginning. Let’s establish why and what you can do to get yourself in that position.

Someone who has a steady job and worked there for a long time has established a history of stability. They aren’t jumping around with different jobs and show that they are valued as an employee.

Someone who has only one residence on their credit file also shows stability and has established that they are not flighty or other serious problem with staying stable in one location. These points are well considered when applying for credit of any kind.

I have also established that living in a particular area has an effect on credit score and whether you can get a loan simply because of where you live. It is not pronounced, but could become a big factor in the future. The factors involved are if you live in a rough section of town or if you live in an affluent section of town. The credit bureaus my credit repair collection agency credit are gathering enough data now to be able to determine enough fact to consider this in the now or in the near future.

Secured loans are just what they suggest… loans that are secured by something of value that you own, such as a home, a car, a boat, accounts receivables, or some other item of value that you can convince your loan office is of worth and they will take the risk to loan against.

One of the reasons you would do this is you need the money… duh! Ok, of course you need the money, but the point is that you need the money for something… say, to get a business started, or because you don’t have enough of a down payment to satisfy the loan company who is giving you the loan. A secured loan helps you get the money or the item you want before the bank trusts you enough to do it without. Some loans never have enough trust to secure it with just your signature, such as a mortgage, or a car.

Ok, how does a secured loan work? When you go to sign your name on the signature line, the loan company is saying that you will need to put up the value of the property, item, and vehicle in case you default on the loan. If you stop making payments, they want to know that they can get their money out of the property even if it is a hassle to take possession, then sell it and perhaps lose some of the value. They will somehow get most of the money out of it, regardless. Now, you on the other hand have just tanked your credit score, because the loan company will report lates, then charge-offs, foreclosure, or repossession on your experian business credit file, thus your score has been devastated.

However, secured loans are a great way to get your credit established and get to the point of an unsecured loan that will show low risk and start your credit scores out right.

When you’re looking for a new mortgage, many lenders evaluate your credit based on the “Three C’s.”

Credit

Is it likely that you will repay the loan?  Are your payments on time and up-to-date?  Are you financially stable and reliable? What are your credit scores?  Today’s marketplace, most conventional lenders require your scores to be in the 700+ range and most FHA loans a 620 score or higher.

Capacity
Are you able to pay the loan?  What kind of outstanding personal debt do you have?  Do you have enough earning power and net worth to repay a mortgage or home equity line of credit?

Collateral
Do you own something of value that can be promised to the lender if you don’t repay the loan?  If you have home equity loans for less than perfect credit collateral may assist your loan request.

There are a few more factors mortgage lenders look into when evaluating your capability of obtaining a loan.  To confirm your responsibility and stability they may examine:

• Your monthly income
• Occupation and length of time with employer (two or more years is ideal)
• Home ownership status and history
• How often you move or have moved; patterns of behavior and the timing of that behavior

And there are other examples such as, if you had a charge-off (when the creditor sells your debt to a collection agency) in your credit file from several years ago and you’ve been able to maintain your credit over the years, you will be judged differently from someone who recently had a charge-off.

But whatever the case, it’s imperative to get off on the right foot when rebuilding your credit.. It is important to establish good credit behavior as early as you can in order to build a solid credit reputation.

Essentially, credit bureaus will look for five main characteristics when determining how high your credit score will be.

In descending order, they are:

1. Past delinquency.  If you have failed to make payments in the past, lenders fear you will repeat that behavior based on your bad credit history.
2. How your credit has been used.  Have you maxed out or spent close to the limit on a credit card?  If so, then you may be considered a greater risk than someone who is more conservative with his or her credit line.  Do you pay off your bill every month or a keep a revolving balance?
3. How long you’ve established your credit history.  The scoring models can judge each individual separately.  Credit reporting agencies may take into account the duration of a person’s credit history.
4. Frequency of credit inquiries.  It is recommended that you check your credit once a year to see if you have a good or bad credit rating.  Creditors requesting reports several times in a short period may send a signal that you are applying for a lot of credit due to financial difficulties, or that you are taking on too much debt and overextending yourself.
5. Your credit variety.  It is best to have a mix of installment and revolving loans (e.g., auto, credit cards, retail, etc).  On installment loans, a person borrows money once and makes fixed payments until the balance is gone, while revolving borrowers make regular payments, each of which frees up more money to access.

It is important to understand all the factors that determine if you have good or bad credit.  It is never too early to begin building a good credit history and avoid bad credit inconveniences in the lending process

Till next week…

Herschel

Starting September 2007, the newest version of the FICO scoring module will ignore all authorized user information when computing scores. The company that created FICO, Fair Isaac Corporation, changed the formula after learning that some credit repair companies were “buying” authorized user slots on the credit cards of people with good scores and “renting” those slots to strangers with bad credit to quickly boost their scores. This made it look like the bad credit person had a long history of build good credit and credit card balance with a high credit limit and very low balance, thus effectively lowering their debt to credit ratio and increasing their history. Credit scores would increase dramatically for them. Not a bad idea and since it still works for the older scoring modules of which most creditors still use, I would suggest not “buying” a slot but borrowing a family members slot on a good card to do the same thing. We call it “piggybacking”.