Credit For First-Time Borrowers
A person without a credit history, who has never had credit, may have problems getting that first loan or credit card. Fortunately there are options available:
- Open a checking and savings account at a local financial institution. If you handle the checking account responsibly and prove to be a valued account holder, the institution may grant you a small loan or offer you a credit card.
- Apply for a retailer's charge card. This can be the first step toward applying for a major credit card, once you have shown an excellent credit payment record.
- Buy the appliances or home furnishing you need using the credit plan of the local retailer.
- Take advantage of the credit cards that are often offered to college students or recent graduates. "Affinity group" credit cards are often made available to members of a particular union, professional group, or interest group.
- Apply for a secured credit card. Designed for people who have no previous credit history, this card requires a minimum deposit that usually equals the amount of credit available on the credit card.
- Obtain a student loan if college-bound. Remember, a student loan is a real loan and getting behind in payments can hurt your creditability.
- Ask a close friend or relative to co-sign for a loan. In doing this, the co-signer is guaranteeing that payments will be made on time and in full. If the credit applicant does not repay the loan, the cosigner will be legally responsible for doing so.
What To Look For
The first question you need to ask in a credit transaction is "What is the Annual Percentage Rate?" The Annual Percentage rate is the cost of your credit transaction expressed as a simple annual interest rate. The annual percentage rate reflects all types of finance charges that are imposed in the credit transaction.
A credit transaction may have a note rate of 9% plus high prepaid finance charges known as "points" or "document fee" that make the annual percentage rate much higher than the 9% note rate. A company might also verbally quote you an "add-on rate" which is also a rate much lower than the actual annual percentage rate. A 10% "add-on rate" can result in an annual percentage rate of 18%.
Read Before You Sign
Your creditor is required to give you specific information to help you understand the terms of your agreement. Those required disclosures must be provided separately, clearly, and conspicuously.
Take the time to read your contract, do not let the creditor rush you. If there is a provision in the contract you do not understand, ask about it.
In addition, credit insurance must not be a factor in the approval of the extension of credit and you must desire that insurance and voluntarily request the insurance for the premium to be excluded from the finance charge.
The creditor may also try to sell you other types of insurance and/or auto club plans. If you do not want them, tell them so. Never be pressured into accepting a product you do not want. The more products added to a loan or credit sale, the more that credit transaction will cost you.
The credit transaction is legal and binding once it is signed by the debtor/s. A loan secured by the debtor' s residence that is not for the purchase of the residence and a home solicitation sale are the only types of credit transactions that have a three day period in which the debtor/s can cancel or rescind the transaction.
Shopping For Credit
Basic Types Of Credit
Revolving Credit — Open-End
Typically covers most credit cards, revolving charge accounts in retail stores, and lines of credit with lending institutions. Sales or cash advances have finance charges calculated on the unpaid balance or average monthly balance and the consumer has the privilege of paying in installments.
A periodic statement is given showing the periodic rate, annual percentage rate, previous balance, debits and credits during the billing period, present balance, balance upon which finance charges were imposed, and minimum payment due and the date payment is to be received.
Installment Credit - Closed End
The granting of credit for a sale of merchandise or service or a cash advance loan by a contractual agreement. The cash price or cash advanced plus allowable additional charges such as sales tax, official fees, and authorized credit insurance premiums is the amount to be financed. The amount financed plus the finance charge is scheduled to be repaid in installments.
The contract must disclose the finance charge rate as an Annual Percentage Rate, the Finance Charge, the amount financed, the total of payments, the number, amount and timing of installments as well as other information pertaining to the contract.
Closed end transactions can be "precomputed" or "simple interest" accounts. "Precomputed" accounts have the finance charge included in the total balance due and each payment is subtracted from that balance. A refund by the Rule of 78s is given of unearned finance charges if the account if prepaid in full.
A "Simple interest" account balance is the principal balance and does not include any finance charges or interest. The interest is calculated from payment date to payment date on the unpaid principal balance; the interest is subtracted from the amount of the installment and the amount remaining is subtracted from the principal balance. When a "simple interest" account pays off, the amount due is the principal balance plus interest due on that balance from the date last paid to the date of the payoff. It is important to know which type of an account your credit transaction will be.
What type of credit is important when shopping for credit? You need to determine the type of credit that will best fit your needs. For example, if you are planning on paying the account off early, you would want to be sure your credit is Open-end or if Closed-end that it will be handled on an interest bearing basis.
Shopping for credit will let you choose the best possible credit terms to suit your particular needs.
- Use the annual percentage rate to compare credit costs.
- Read the credit agreement before you sign.
- Don't be afraid to ask questions if you do not understand the credit agreement.
- Credit Life and Accident/Disability insurance can not be required by the creditor unless they include the premium in the finance charge. If a creditor requires the insurance, be sure they do not show it as an additional charge.
- Other products the creditor tries to offer you must be voluntary. If you do not want them do not let the creditor pressure you into accepting them. They increase the cost of your credit transaction.
Where To Shop For Credit
It is important to shop for credit just like you shop for new clothes or a new car. You need to compare the cost of different companies' credit transactions the same as you would compare the cost of a new car.
If you are making a purchase on credit, shop different merchants not only for the best buy for the product but also the best buy for your credit transaction. If you are planning on taking out a loan, shop around to the different types of financial institutions such as banks, credit unions, savings and loans as well as finance companies to fine the lowest finance charges for your particular needs.
Credit unions make loans available to members only. You can join a credit union that offers membership to qualified employees. If your mother or father is a member of a credit union, you can probably also join. You must have funds in the credit union to become a member. Credit union loans are usually closed-end loans; payments are deducted from the employee's pay. Credit unions usually offer loans at rates below maximum rates allowed under state laws.
State and National Banks, State and National Savings and Loan Associations and Banks
Banks and Savings and loan associations make all types of loans, secured and unsecured at rates usually below maximum rates allowed under state laws. If you have a checking or savings account at a bank, they would be a good source of credit. Borrowers may have to pledge their savings accounts as security on loans.
Finance or Loan Companies
Finance or loan companies usually make larger loans, secured by autos, luxury goods, or real estate. Most of these companies will impose the maximum rates allowed by state statutes.
Creditors who finance their own purchases such as "Buy-Here-Pay-Here" used auto and furniture dealers. These types of credit are closed-end. Department and Jewelry stores who have their own charge accounts also known as revolving charge account. These accounts are open-end credit. The present rate imposed by most of these creditors is 21% Annual Percentage Rate.
ONCE CREDIT IS GRANTED, THIS IS THE BEGINNING OF YOUR CREDIT RECORD, WHICH WILL FORM THE BASIS FOR FUTURE CREDIT.