Upon having established a firm payment history, a borrower is able to begin making strategic choices about how it is that they’re going to pursue bringing their rating up from a mediocre grade to a good one. Because of the way in which the incremental savings that a 1% decrease in a mortgage or car-loan interest rate will be much larger than a few percentage points on a smaller credit card or time planned loan, it is worth a borrower’s time to look at how some incremental debt can make large improvements to their long-term credit rating.
Ideally, it is possible for a dedicated borrower to increase their rating to a very favorable point within only two years of real activity. The trick is then to manage the types and amounts of credit-building debt so that they are within our means of servicing.
As mentioned in previous articles from this week, a borrower’s ability to access existing lines of credit can have a significant impact on their rating. However, it is also important for a borrower to demonstrate that they have personal experience in managing different kinds of debts, so that their file shows them as being a sophisticated borrower. By carefully planning out their accounts, a borrower is able to look at their options, and plan out how to strategically ensure that they have a file showing a broad exposure to various kinds of debts.
Be they secured, revolving, or time planned, debts can always be structured in a way that accommodate a specific need. By taking the time to plan out a function for each of these loan-types on a smaller scale, long-term borrowing goals will be facilitated.
One of the easiest ways to build up exposure to various types of loans is to actively seek them out. Credit cards are often considered to be a good starting point, because they provide manageable limits, and provide 1-month of flexibility on payments. Upon maxing out a credit card, an individual can then free up the credit on that card by taking out a single time planned loan with a much lower interest rate, and then make sure that the card is no longer used to carry interest.
Upon paying off the time planned loan, a borrower can discuss re-opening the loan as a revolving line of credit, and then securing an additional amount against a vehicle for the sake of creating experience against with a secured loan. Throughout this entire process, the borrower has gained exposure to the major debt classes, built up a re-payment history, and established access to credit in a way that makes their credit application very attractive.
What’s more, the borrower may have taken all of these actions across a single principle amount of less than $5,000, paid less than $1,000 in interest, and created the net benefit of tens of thousands of dollars on their final debt goal (ie. A mortgage).
