If you are in the market for a used car but don’t have much in your savings account to budget with, you might be considering financing the cost, either through a used car dealership financing program or from an independent lender. Many young people think that since they don’t have any debt, getting a loan shouldn’t be a problem at all, but that is a huge mistake to make. Banks work by determining who might be risky to lend money to and who is less risky. They do so by checking past credit history. If you have no credit history, there is no way for lenders to anticipate what financial decisions you will make in the future.
People who have absolutely no debt, have never taken out a loan, and have chosen to be responsible by always paying cash may be unwittingly hurting themselves. Although it seems counterintuitive, if you don’t borrow money, you might have a harder time borrowing money. Lending institutions want to have a history of what you have done in the past to forecast what your habits may be in the future. So not borrowing at all might be your biggest credit score downfall.
What is a credit score?
A credit score or credit rating is a number that reporting credit agencies assign to people’s financial situations. Your credit score is a calculation of how much risk you pose to a borrower. The higher your score is, the less risky you are perceived to be by those who are considering lending you money. Credit reporting agencies use many factors to determine the amount of risk that you pose to a lender by looking at your past financial tendencies. If you don’t have any, then they have nothing concrete on which to base the risk of your repayment behavior.
Credit scores are calculated by considering how much debt you owe through things like mortgage loans, home equity loans, credit card debt, and even student loan debt. The score also factors in things like when you don’t pay your bills and they go into “collections,” or if you make a late payment on your bills. So, not only are you charged a late fee, but those late payments can add up to huge dings on your credit rating.
If you have been responsible, why does not borrowing penalize you?
Many young individuals are dismayed that they aren’t able to get a loan when they have been responsible and haven’t ever had to borrow money. As stated above, though, you need to borrow money to borrow money. A credit agency wants to see that you can take out a loan, pay it on time, and pay it off, instead of having revolving debt from month to month and high-interest charges that continue to accumulate. When you have credit cards or a loan that you pay off consistently, and in full, that will increase your credit rating and make it possible for you to borrow more.
How do you fix the problem of having no credit history?
The good news is that fixing your credit score by creating a credit history is pretty easy. One way to establish credit is to apply for a credit card. Once you are accepted, use the credit card every month for bills or purchases. The key, though, is that you must pay it off every month on time, and not carry a revolving balance. That is always a good idea because then you won’t have to pay any finance charges for use.
Another way you can establish credit is by taking out a personal loan. Go to the banking institution you already use and attempt to take out a personal loan. It will cost you a small fee to borrow money, but building your credit history is extremely important to make purchases like a used car in your future. As with a credit card, make sure that you make the payments on time every month, and that you pay off whatever repayment terms you have surrounding the personal loan.
Borrowing money to borrow money might not seem to make much sense for young people who have been responsible with their cash. But it is the only way to establish your credit history and get a loan to buy a used car. The good news is that fixing your credit can be easy if you take the right steps now to do so. One good way is to come see us at Ride Time. If you have a valid Canadian driver’s license, proof of 3 or more months of continuous employment, and a paystub showing at least $1500 before deductions, we can work with you so that you might be driving away with the car of your dreams in no time.