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Credit Application Tips

by Bill Laidlaw

There are 5 main steps to establishing credit:
(1) Open a checking account if you don't have one. Even if you have to pay a service charge, it looks very suspicious to a credit grantor if you have no checking account on your application.

(2) Get store & gas station credit cards, at least 2 of each if you can, this will give you credit card references even though credit grantors can't really check because only charge-offs from store or gas station cards show up on major credit reports (and you don't need bad marks like that, so pay those bills on time). This will also give you credit card numbers to put on the application, if requested.

(3) Get a small loan somewhere, even if it's a 90 day secured loan (banks love those because you're borrowing your own money), and make the monthly payments on time or even early. Make at least 3 separate payments (don't take out the loan and pay it off the next day). This will look very good on your credit report.

(4) If you belong to a credit union, get your loan there, the terms should be better than a bank & much better than a loan company, though you'll still probably have to put up collateral (credit unions call them share loans) at least equal to the loan until it's paid off. Credit unions were originally set up for a particular business or government employee group, but most now allow the general public to join. This might also be your source for a no-fee or low-fee checking account.

(5) Can't get a loan yourself? Get a cosigner. Even a friend or relative might help if they know you're doing it to build good credit & they'll get their money back when your secured loan is paid off, since you'd be crazy to default on such a loan...

Free credit report.
Most national credit agencies want to charge you for your own credit report but there's a way around this. Simply apply for one or more credit cards. Either you'll be approved on your first one (great!) or you'll be turned down. If you are turned down because of something on your credit report, and that's the usual reason, the credit grantor will give you the address and/or toll-free number of the agency that supplied the report. You then have up to 60 days to call or write for your free credit report. The 3 biggest credit reporters are TransUnion 800-916-8800, TRW/Experian 800-682-7654, Equifax 800-685-1111. The U.S. government also requires all three to give you one annual free credit report.

Better yet, check out your current credit report in advance for free. Free Credit Report.com will let you see your own credit report on-line as part of a free 30-day tryout of their many consumer services.
If you see any errors on your credit report, demand that the credit agency check their sources. They have 30 days to confirm the "ding" on your credit or remove it from their reports. If confirmed by the source, you can still write an explanation and have it added to your report "I missed that month's payment because I was in the hospital getting a heart transplant, but I made a double payment the following month" (be sure it's true, the original source might dispute your explanation otherwise).

Do you buy or rent (or worse, live with your parents)? The credit grantor wants to see "own" on the application so if you are even in the process of buying a home, put down "own" and the monthly mortgage amount instead of rent.

Outstanding obligations.
The total amount you pay in loan, credit card payments, rent or mortgage payments, car payment, etc., should not be more than 1/3 of your monthly income (preferably 20-25%), including the monthly payment (usually 3% of the balance) on the credit card or loan you are applying for. Total loans & credit balance (even if not used, not counting mortgage) should be no more than 20-25% of annual income. Credit grantors also like to see credit cards or revolving credit balances that have a total balance of 25% or less in use. So if you have a major credit card with a credit line of $1000, the balnce should be no more than $250 leaving $750 available. Believe it or not, credit grantors like to see lots of credit cards and credit lines that are already available to you but not in use! For this reason, you should never pay off and close a credit card before applying for credit, it actually hurts your credit score.
Most employers will not give out how much an employee makes, and some credit grantors don't even bother to check so long as employer's name is spelled right (employer's name will be listed on your credit report, so if you have more than one, always list the same employer name on applications). But some do check so always be truthful. Even the IRS concedes that most Americans are honest. Banks aren't as powerful as the IRS so they have to look at your past credit record to decide if you are a good credit risk.
To improve your chances:
(1) Have credit card or loan payments paid by auto-debit from your checking account if possible. Bankers like getting loan payments this way because it's automatic.

(2) Have statements sent to home address, not a PO Box or work, and never a national service like Mail Boxes Etc (TRW/Experian deems this "onfile address identified as high risk" if used as a mailing address to apply for credit).

(3) Don't put "self employed." Even if most of your income is from self employment, if you are also employed by someone, put that name & address on the employer line and put self-employment income on the "other income" line. Bankers like to see an outside boss, even if your spare time income selling software on the internet is bringing in more money than your monthly paycheck. If "other income" is a sizable portion of your income, be prepared to prove it. Most credit grantors ask for 2 or more years of tax records to prove non-employment income.

(4) Years with employer. The banker or credit grantor likes to see at least 5, preferably 7 or more years with your current employer.

(5) A savings account looks good on your application. If you don't have one but do have a secured credit card, guess what? You have a perfectly honest savings account. The credit application doesn't care that your savings account is being used as security for a credit card or loan, just whether or not you have one.

(6) Bankruptcy. If you've heard how easy it is to get credit after declaring bankruptcy, there's a bridge over San Francisco I'd like to sell you. Bankruptcy stays on your credit report for 10 years and stands out like a sore thumb whenever you apply for credit or look for a job or apply for insurance (yes even employers & landlords can legally look at your credit report without permission these days). If you're thinking of Bankruptcy chapter 7, 11 or 13, call your local Credit Counseling Center instead at 800-493-2222, or the Consumer Credit Counseling Service at 800-338-CCCS. They work behind the scenes with banks and creditors to work out a 36 month repayment plan at low or no interest, and don't even charge you a fee to talk about it. Most banks & credit card companies go along with a CCC plan rather than lose everything in bankruptcy. Probably the easiest loan you can get is for a car, but not even a used-car dealer will overlook a bankruptcy - "60 Minutes" found some high-risk borrowers being charged 36% or more on car loans...

(7) Credit insurance. Sure, check the insurance box on your credit card application if you really want it, but it won't effect your approval for credit one way or the other. Most such insurance is provided by a third-party, not the credit card issuer.

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* Capital One provides a free Credit 101 page, on how to safely use credit online, with separate pages on Credit Basics, Credit FAQ, Credit Protection (including Identity Theft tips), and Financial Education Partnerships
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