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Credit scores play a crucial role when it comes to taking out a loan. Whether you borrow funds from a bank or an online lender, you need to have a stellar credit score to get a loan at a lower interest rate.
Though you can have very bad credit loans with no guarantor from direct lenders on easier terms and conditions, it does not mean that credit scores are no longer important. You must remember that an excellent credit score enables you to get a loan at an affordable rate of interest.
However, building credit is also the issue for those, who have no credit history. It is hard to get a loan if you have little or no credit history. How will you show the record of responsible repayments unless you get a loan approved? Here are some ways to build credit:
Authorised user status
Your parents and close friends may help you financially by adding you as an authorised user on one of their cards. This enables you the right to use the card of primary holder.
If you are an authorised user of reward credit cards, your parents will also get cash back on every transaction you make with the card. However, you must remember that any default will affect credit scores of both parties.
Asking your parents to act as a guarantor
Whether you are applying for a credit card or a short-term loan, you may ask your parents to act as a guarantor. This will increase your chance of qualifying the loan provided they have a good credit history.
Here you are obliged to pay back your debt, otherwise the lender will call upon the guarantor (your parents) to reimburse the debt on behalf of you. This will take a toll on credit scores of both parties – you and your parents.
Credit builder loans
Credit unions, banks and online lenders provide credit builder loans to borrowers, who have little or no credit history. The basic purpose of these loans is to help you build credit and therefore, they carry a low interest rate.
Once your application is approved, you will have money transferred to your savings account, which you will not use unless you have repaid your loan. If you successfully pay off the loan, your lender will send your report to credit bureaus. However, late payment will not only attract penalty but also pull your credit score.
Repayment of student loans shows up on your credit report. It has a direct impact on your credit score. These loans may help you build credit if you repay the loan timely. Keep in mind, late payments may pull your scores. It is better to opt for auto-debit payment mode so that you do not fall behind repayments.
You can build credit by buying a car as long as you make all repayments on time. If you prefer paying for your car in cash, you will save your money in interest but it will not help you build credit. Auto loans can be expensive. Make sure that you are applying for these loans only when it is a necessary purchase. Buying a car solely for building credit does not make any sense.
Build good habits to build a good credit score
If you want to have a good credit history, you must repay all of your debts on time. However, this is not enough. Your credit score shows how much you are responsible to meet financial obligations. Consider on-time payments of your credit card bills and utility expenses. If utility expenses go unpaid, the service provider will update credit bureaus and as a result, you will lose your score.
Keep your credit utilisation rate low. If you have used your credit card, make sure that you settle the outstanding account within the grace period. Do not consume more than the 30% of your credit card balance. The more the balance your credit card has, the lower the credit utilisation is.
Do not apply for any loan applications and credit cards within a short span. Each time you apply for a loan, the lender makes hard inquiries to know about your creditworthiness that shows up on your credit report. The higher the hard inquiries, the lower your score will be. Multiple loan application will allow of an interpretation that you rely on loans for meeting all of your needs.
Do not close your credit card accounts even if you do not use them. This will help you keep your credit utilisation rate low. You should keep your unused cards open to show the length of repayment history. However, make sure that they do not set you back high annual fees.
You should peruse your credit report to detect any error or default that you have not made and show up. Contact credit bureaus and ask for the corrections if you spot any error.