How to Establish A Good Credit Rating by Jay Anderson, Loan Broker © 1986
As a loan broker, I am often called upon to make a loan to a
new or existing business. After a business has been around for a year or so, they have usually developed a good relationship with at least one bank. If an existing business needs a loan for business expansion, the bank they have been dealing with all along is usually willing to make the loan. This is especially true if the business wants to borrow the money up to the amount of money that they already have in an account. Or perhaps they will use their existing account as a "compensating balance", which means they can borrow perhaps $40,000 on a $10,000 existing account.
This is fine for an existing, established business. But
what does a new business do to establish credit? Maybe you are someone looking to borrow a sum of money to open a new business or wish to invest the money in a "sure-fire" investment. In these cases, unless you have an already established credit rating in good standing, you will have great difficulty in obtaining the funds you need.
What I am about to describe is a method that will allow you
to establish credit, even if you have no credit history or even a lousy record of using credit in the past. I have used these methods many times when I have assisted my clients in getting loans where their credit history was the deciding factor as to whether they would get the loan or not.
Before I describe these methods, let me emphatically stress
the following point. NEVER borrow money with the intention of going into debt. What do I mean by this? This means that unless the ultimate outcome of borrowing money will be to make a PROFIT on this money, then you are not using credit wisely. Ask yourself these questions before borrowing any money: * Will the venture I am using this money for ultimately pay off the principle plus interest, and still leave me with a profit? * Will whatever I plan to buy on credit outlast the debt? * Will the interest charges make the purchase a very expensive one? * Could I possibly rent or lease the item, possibly with the option to buy in order to free up this credit for other purposes? * Do I truly know the actual cost of using this credit? * Can I realistically make the payments?
Basically, don't treat credit lightly. There a a huge
difference between buying something solely for the pleasure of owning it and buying in order to make a profit. Keep this clear in your mind before using your new found credit.
The Bank, Your Best Credit Reference
In order to obtain excellent credit references from several
banks, you will need $500. If you don't have 500 dollars, perhaps you can borrow this amount from someone, or even save it up from a weekly pay check. You see, you are not going to actually spend this money, just a small part of it. Your actual cost will be minimal compared to the benefits you will ultimately gain by following this procedure.
Take the $500 and find a convenient bank that offers a day-
of-deposit to day-of-withdrawal type of savings account. Most Savings and Loans offer this type of account. If you already have this type of savings account, you will save the bother of this first step.
A week or two after you have opened this account, apply for
a $500 loan at the same bank, payable in 12 monthly installments. You will have no trouble getting this loan, no matter what your past credit history is. This is because you are going to surrender your savings pass book as collateral for the loan. Since you have $500 in the account, the bank will not check into your past credit history since this is a NO RISK loan for them to make. As a matter of fact, banks love to make this type of loan. Not only are you a savings customer, but you are taking your loan business to them and offering as security … CASH!
Now take your $500 of borrowed money and find a second bank
offering the same day-of-deposit to day-of withdrawal account and deposit this same amount into the account. Be sure to go to a totally different second bank and not just another branch of the first bank. To recap, you now have two savings accounts with a total of $1,000 earning interest from the day of your deposit. Now go to the second bank a week or so later and ask for the same $500 loan using your pass book as collateral. Again, you should have no problems since this is a no risk loan for the bank.
Repeat this process with a third bank the exact same way you
did with the first two banks. If you have any doubts that this will work, my clients have done this dozens of times. In only one case did the banks check with each other only because my client was foolish enough to write down the names of the other banks on the application to the third bank. But there are plenty of banks around, and filling out another application at another bank solved the problem.
Finally, go to a fourth bank that offers a free checking
account with no minimum balance required. (At the time of this writing, Roosevelt Savings and Crossland Savings offer this type of account in the NY City area.) Take the $500 and open a checking account with it. Make sure the deposit is with cash so you can start writing checks immediately. Send a check to cover your first loan payment at each of the three banks, even though the first payment isn't due yet. A week later make your second loan payment, and a week after that, make your third loan payment to all three banks.
You are now three months ahead in your loan payments to
three banks. This serves the following purposes: 1. You have freed up an amount equal to the three payments in your three savings accounts. 2. You now have an excellent source for a credit reference … three banks! 3. You have savings accounts at three different banks plus one free checking account. 4. You still have most of your $500 intact as about 1/3 or more of the interest is offset by the interest you are getting on your savings account. 5. You can now walk into any bank or lender and offer 4 banks as a reference, three of which you have borrowed from and paid back early. 6. Credit card companies will discover your excellent repayment habits when they investigate any application for credit submitted to them.
A credit investigation at this point should no longer make
you tremble in your boots. In fact, you should welcome these investigations at this point. The great thing is that you have accomplished all this at a minimal expense and under 30 - 45 days.
In the next article in this series, I will show you how to
use your new found credit to obtain credit cards to your heart's content. But as I stated earlier, unless you are going to use your cards to make you money, you are not using this resource properly. -
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