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Borrowing to Build Credit

February 23, 2014
Plain English Version

Couple signing contract in a man's officeThe phrase “counter-intuitive” means going against the obvious. For example, it doesn’t make sense to borrow money (with interest payments and fees) to buy something rather than saving money to buy it (no interest payments or fees).

But experts say that borrowing and repaying money is the best way to build credit. Yes!! That’s the way to get a credit card!

A good thing happens if the credit card holder repays the amount due each month. His or her credit rating goes up. The goal is a credit score of 689, the national average. A credit card is key to making larger purchases – cars, homes and appliances.

A good credit score is something employers look at when hiring. Landlords look at it when renting. Utility companies look at it when deciding how much of a deposit they will want.

Now there are programs to help lower-income consumers borrow and repay money.

One such program, the Local Initiatives Support Corporation (LISC) in Chicago, uses a “lock box” strategy.

As an example, a person in this program borrows $300. The loan is put into a “lockbox. The borrower does not see it; he cannot  spend or get it. He pays the loan back in monthly installments of $26.24 payments (includes a $1.24 interest payment).  The payments go directly into the lock box.

At the end of the year there is $626.24 in the lock box. The lender takes its $326.24 in payments for the loan. The borrower finally gets his paid in $300 (now a paid-off, no longer owed loan) out of the lockbox.

LISC then matches the now-paid off, no longer owed, loan with $300 from the LISC program.   The borrower now $600 and a solid credit record of responsible payment history.

That is the great and profitable reason to get into this program.

Now, if the person applies for a credit card, his credit score is likely to be high enough because of his newly established payment history. There is a good chance he will get it.

Payday lenders and others are always looking for people with low credit scores. It allows them to make very high-interest loans.

Having a good credit record history ends all that.

Source: The New York Times

February 11, 2014


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