Many experts say that having no credit can be just as bad as having bad credit, because there is no history to say if you are a good or bad risk when requesting loans.
Building a good credit record is no easy task. It may be frustrating and tedious at first, but following are some tips to make the journey to credit freedom a little easier.
* Try a secured card with a banking institution for 6 to 9 months.
A secured card is very much like a savings account where you may put $500 down as a deposit, which serves as collateral. Some institutions will issue a credit card with a credit limit usually no greater than the amount on deposit. Make sure the issuer reports your timely payments to one of the three major credit bureaus. By using your card responsibly and paying what you've spent every month, you will see your credit score improve.
* Establish credit by applying for one or two credit cards.
Setting up revolving debt credit cards like Visa, MasterCard, American Express, Discover or any department store credit cards is important to your credit history because it's a self-managed account and you know you have to pay an installment at least once a month. Financial advisors warn you to use them carefully and pay them off on time each month, or at the very least, pay the minimum amount required.
* Keep credit card balances low.
Don't "max out" your credit cards. Credit scores are based upon what percentage of the credit line is being used.
* Pay your bills on time.
How you've paid your bills in the past can indicate how you'll pay in the future. Credit scores emphasize your recent payment record, so if you've been late, start paying on time.
* Don't apply for too many loans or new accounts.
Requesting a lot of credit in a short time span may prompt lenders to be concerned that you won't manage your debt well.
Tuesday, June 28, 2005
Monday, June 27, 2005
Beware of home equity loans to buy a car
Is a customer better off to use home equity to buy an automobile? Or is dealer-financing a better option? Let's explore.
Home equity loans became popular after a 1986 law phased out tax deducting consumer interest for installment loans and credit cards. They did, however, leave the deduction available for a second mortgage or home equity loan. The idea was that the deduction would be used for improvements to the household, therefore, improving the value of the property.
Unfortunately, it wasn't foreseen that this opportunity would be misused, mostly for automobile purchases. The use of a person's equity towards a car loan has created a financial burden to many people.
Here's how:
A customer purchases a new vehicle for $25,000. Instead of taking out a car loan, they'll use the equity in their home. At the time of purchase, they receive a free and clear title and a low monthly payment because home equity loans are typically set up with a minimum monthly payment like a credit card, or longer term.
Three years later, the customer decides to purchase another car. Now their car is worth about $12,500, but since they are paying a low monthly payment, they still owe $18,000 or more on their home equity loan. They buy a new car for $30,000 minus their free and clear trade of $12,500 and they now have to finance $17,500 while still owing $18,000 on the previous loan. This is where the vicious cycle begins.
Here's advice from the Federal Reserve Board Consumer handbook on what you should know about home equity lines of credit:
"If you are in the market for credit, a home equity plan may be right for you or perhaps another form of credit would be better. Before making this decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And, remember, failure to repay the line could mean the loss of your home."
In other words, home equity loans might not always be the best form of financing for the customer.
But remember, people buy for their reasons, not ours. Pointing out the problems with their choice might not always be the best option. I prefer to take the road that gives us the best opportunity to retain their financing, and not run clown their choice and potentially cause customer dissatisfaction.
Home equity loans became popular after a 1986 law phased out tax deducting consumer interest for installment loans and credit cards. They did, however, leave the deduction available for a second mortgage or home equity loan. The idea was that the deduction would be used for improvements to the household, therefore, improving the value of the property.
Unfortunately, it wasn't foreseen that this opportunity would be misused, mostly for automobile purchases. The use of a person's equity towards a car loan has created a financial burden to many people.
Here's how:
A customer purchases a new vehicle for $25,000. Instead of taking out a car loan, they'll use the equity in their home. At the time of purchase, they receive a free and clear title and a low monthly payment because home equity loans are typically set up with a minimum monthly payment like a credit card, or longer term.
Three years later, the customer decides to purchase another car. Now their car is worth about $12,500, but since they are paying a low monthly payment, they still owe $18,000 or more on their home equity loan. They buy a new car for $30,000 minus their free and clear trade of $12,500 and they now have to finance $17,500 while still owing $18,000 on the previous loan. This is where the vicious cycle begins.
Here's advice from the Federal Reserve Board Consumer handbook on what you should know about home equity lines of credit:
"If you are in the market for credit, a home equity plan may be right for you or perhaps another form of credit would be better. Before making this decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And, remember, failure to repay the line could mean the loss of your home."
In other words, home equity loans might not always be the best form of financing for the customer.
But remember, people buy for their reasons, not ours. Pointing out the problems with their choice might not always be the best option. I prefer to take the road that gives us the best opportunity to retain their financing, and not run clown their choice and potentially cause customer dissatisfaction.
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