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How Do I Establish Credit?

4 min read

How do I best position or establish myself to be able to obtain financing? Whether it is for a car or a home, the beginning is the same. It has been my experience that most car financing companies are looking for a minimum of credit that has already been established and proven for a minimum amount of time. What do I mean by this? As a Business Manager at car dealerships for over 10 years I have found these companies are looking for at least 3 trade lines (3 types of credit) usually credit card, installment loan, and perhaps a line of credit with at least one of them being for a minimum amount of $2500 dollars. This is how I recommend you start to establish credit. Once you do this you are well on your way to a 700 plus credit score.

This is only one way to accomplish this. Take $2,500 from savings and open a secured line of credit. For those who do not have $2,500 start with $500 and follow the same steps. I am available to help anyone with an individual plan. Now, this can be done usually at a local credit union as they have different rules then your traditional banking institutions. For those who are not familiar with the secured concept you will deposit the money in the bank and agree to leave it there while the bank opens an account in the amount you deposited. Make your first transaction in your line of credit a deposit of $1,000 dollars and open a secured installment loan. This can actually be done at the same institution on the same day and then take the check they give you and deposit that check into an account to open a secured credit card. This will give you 3 different type of credit accounts with one of them being at least $2,500!

Having made these transactions you will have a total of $4,500 dollars in credit extended to you. Now all you need to do is make your payments on time for the next 6 to 9 months and you will have created a very good credit score with all the qualifiers the financing companies are looking for. This is not always as easily done as said. There are other considerations you want to keep in mind. You will need to utilize these accounts and keep track of what you spend in these accounts. To achieve the best credit score I suggest you keep your charges at no more than 40% of the accounts available credit and keep your monthly balance at or below 30% of your credit limit. This will show the credit companies that you use the credit responsibly and give you the best scores you can achieve with the credit scoring models. This has been my experience over the course of my financing career. While I don’t claim to know the actual formula this is what has produced the best scores with my clients in the past.

By the time you have done this and made these payments on time you will have the credit necessary to purchase your first financed car. Now you will need to have the financial means (income) for most folks that is a job but the type of income is of less importance then the amount of income as these companies use a table of ratios to qualify you. Provided you meet their criteria you will get a car loan approved in your name.

Let us assume that you have qualified for a car loan. We have no reason to think you have not given up on the plan and have gone ahead and made your car payments for the following year. You will have made all your payments on time for over 2 years. On over 4 different types of credit now you should be able to qualify or least be credit worthy of qualifying and applying for a mortgage. You will have made all your payments for 2 years straight and established yourself as a good credit risk. You have raised the levels of your credit to a point well above the $4500 level when you bought your car. Now you need only have the income and savings qualifiers to get approved for a home loan. When you apply to buy a home you will be subject to qualifying based on a table of ratios; bills to income, payment to income both before and after the house payment is taken into consideration. By following the rules and steps laid out in this article you should be credit worthy to buy a home that is within your means. You will have established your credit and achieved a good credit score.