Smart Borrower Center
Tools to help you borrow better
You’ve graduated from college, got your first job and have finally cut your financial ties with mom and dad. Even if you’re fortunate enough to be debt-free, however, it’s often difficult to borrow money for the things you need if you have no credit history.
Here’s a quick guide to developing good borrowing habits to carry into your future.
Getting a credit card
Your first goal should be obtaining a credit card. Your bank can usually help you apply for a Visa®, MasterCard®, American Express® or Discover® card. Expect to be granted a low spending limit ($500 is typical for a first credit card). Once you demonstrate that you can handle credit responsibly, you will be approved for a higher limit. Don’t be misled by introductory offers. Some cards advertise zero percent interest for a number of months, but their rates go up dramatically after that.
If you have trouble obtaining a major credit card, another option is to apply for one at a department store or gas station. Those cards often carry higher rates, but they are generally approved more easily and, used responsibly, can help you start to build up a good credit rating.
But once you get a credit card, don’t let the convenience of “buy now, pay later” tempt you to overspend. Try to use your credit card the same way you use your ATM card -- as a convenient way to shop without carrying cash, not as a way of putting off payment or of buying things you could not otherwise afford.
Finally, if you can’t pay your entire balance at the end of the month, it’s critical that you make at least the minimum required payment. Missing even one or two payments will put a blemish on your credit report and make it harder for you to get approved for a loan later on. Furthermore, if you don’t get in the habit of paying off the entire balance on a regular basis, you will end up paying a great deal in interest charges and may wind up over your head in debt.
Getting a car loan
For many people, buying a car means taking out a substantial loan for the first time. If you have little or no credit history, you can still be approved, but you’re unlikely to get the lowest available interest rate. Having a credit card in good standing will help. This will improve your credit score and demonstrate to lenders that you can manage debt.
Many car dealers offer their own financing but you should still shop around. You may be able to get a lower interest rate through an independent lender, and paying a dealer in cash can sometimes get you a discount.
One of the biggest dangers when taking out a first car loan is being drawn in by the promise of low monthly payments. Ideally, you should be able to pay off a new car in three to five years. While the payments on a six- or seven-year loan will be lower, you’ll pay more interest in the long run and you may find yourself owing more than the car is worth. Remember, a car is not an investment; it’s a depreciating asset.
Getting a mortgage
Buying a home or condo is exciting but, particularly when taking out a mortgage for the first time, it’s important to do a little research to make sure you get the best one for your needs.
Get familiar with the different types of mortgages -- including fixed-rate and adjustable-rate loans -- and decide which suits you best. If you’re risk-averse, for example, you may find the uncertainty of an adjustable-rate mortgage too stressful, even though it may provide you with lower payments in the short term.
Look beyond the posted interest rate to the total cost of your loan. Ask your lender for a good-faith estimate of all of the closing costs, and look at the loan’s APR (the annual percentage rate, which factors in most of these additional charges) when comparing offerings from different lenders.
Do your best to come up with a down payment of 20 percent. You’ll likely pay less interest and won’t have to buy private mortgage insurance (PMI). If you can’t afford such a large down payment, check into FHA and other government programs that can help first-time home buyers.
Finally, don’t buy more house than you can afford. While it’s tempting to want to move into your dream home right away, it’s better to start small, build equity in your first house, and move up later as your income allows.
Published on April 19, 2007