Some individuals believe that it is best to have absolutely no debt. In some cases this is true, but if you are trying to get a loan, nothing could be further from the truth. In the eyes of a lender, an individual with no credit is almost as risky as an individual with bad credit. To the bank, you are basically a walking talking question mark, which makes you a potential liability and the number one thing a Bank is trying to avoid. Lenders are looking for a positive history of how you handle debt. This is why for a person who has just file bankruptcy, it may take a while for them to show potential lenders that they have learned their lesson and are now committed to improving their credit habits.
So what type of individuals am I referring to?
Maybe you’re young or in college and have yet to apply for credit. Maybe you’ve recently file for bankruptcy, a foreclosure, or some other difficult financial situation. Many people who go threw tough times vow never to repeat their past mistakes and shun the credit card industry as an evil empire. However, for some purchases it will be almost necessary to show positive credit history. This includes buying a home. Unless you can save several hundred thousand dollars in cash, which is what a home costs in many cities in the USA, you may have a hard tome obtaining a mortgage and purchasing that home.
Credit has become increasingly important with the mortgage meltdown and overall market slowdown. Banks are hungry for capital and are therefore less likely to give it away to risky candidates.
Building or re-building a credit report is not a quick-fix situation. It takes a year or two to complete and simply paying your bills on time. I was able to improve my FICO score from 550 to 708 in less than two years by paying down my debt, establishing new credit, and ALWAYS paying my bills on time – especially my Mortgage and Credit Cards who are the fastest to report late payments.
1. Fix Your Credit Report – Playing Good Defense
First, obtain a copy of your credit report and examining it for errors. The only place you can get a truly free copy is at www.annualcreditreport.com. With a copy of your credit report on hand you can easily contact the parties that you may have disputes with as all their contact info is usually available on the credit report itself. Secondly, all three credit reporting agencies have online systems where you can file disputes and have them investigated. However, it really helps to have some concrete evidence to justify your claim which is why contacting the creditor directly is so important. Having your report in tip-top shape will help you immensely when you begin to apply for new credit, and I will be the first to tell you being a professional real estate investor, CREDIT IS EVERYTHING.
2. Get New Credit – A Strong Offense
Once you have fixed your credit report, you are ready to start playing some offense and build some good stats. If your credit is really bad you wont be able to get a credit card unless you put down some collateral. Go to your local bank and see what they have in terms of emerging credit cards. They may require you to put down a $100 deposit and they will give you a $100 credit limit, in other words you will eliminate all the potential risk, but that’s ok. All you want is the ability to show that you are responsible and can pay back your debt and a credit card is the best way to do so. But be prudent. If you stack too many open accounts, you may be denied new credit based on your debt-to-income ratio; if you show excessive credit inquiries, you may be denied for that.
Community Based Lending – The Way of The Future
Another great option is to use new websites like Prosper.com [http://www.prosper.com/join/grossbuddha] to build up your credit. One word of caution – You must have a credit score of at least 550 in order to be accepted into the system. Prosper is different from other lending institutions in that regular individuals decide if they want to lend to you and compete on your loan. All you have to do is sign up, build your profile and decide how much you want and what rate you are willing to pay. I suggest joining a group or team with a good track record of paying back loans because this will attract more lenders and ultimately lower your rate. If you have low or emerging credit you may wish to keep your rates at the default 35% and try to attract lots of lenders by joining a group, getting referrals, and providing strong details and reasons why you will be able to pay back the loan. Most loans don’t get funded because borrowers don’t follow these three important steps.
Hope this helps to get you back on track and on the path to financial freedom.
