Do you have big plans? Here are 5 times your personal credit may not be enough

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The world of finance does not entirely revolve around personal credit.


Key points

  • Having a personal credit history is very important, but it is not always sufficient in all situations.
  • Business loans may require establishing business credit separate from your personal credit.
  • Not having enough credit history or having a bad credit history may mean you need a co-signer to help you get financing.
  • Some situations require more than credit, they also require money.

It’s hard to overstate the importance of credit in today’s financial landscape. Everything from personal loan applications to mobile phone contracts may require a credit check. And many things get a little more difficult without an established credit history.

Sometimes, however, your personal credit simply won’t be enough. When this happens, you may need to take other steps to keep your plans on track. Here are some common scenarios where you may not be able to rely solely on your personal credit.

1. When you need financing for your business

If you have a small business, that is, not a corporation, your personal credit will affect many aspects of your business finances. Small business credit cards, for example, require a personal credit check and a personal guarantee.

But your business will also need to build its own credit. Many kinds of business financing will rely on your business credit instead of or in addition to your personal credit during the approval process.

Establishing business credit is not as simple as establishing personal credit. While you can build personal credit with a credit card and time, building good business credit takes more hands-on effort. In the long run, however, this effort can really pay off by making financing easier, improving loan terms and improving relationships with suppliers.

2. When you have a limited credit history

One of the big pitfalls of finance is that you often need credit to get credit. Lenders like to see that you can manage credit responsibly before extending more credit. As such, it can be difficult to get new credit while you’re still building your credit history.

There are several ways to circumvent this obstacle. The easiest way to build a lean credit history is to get a starter credit card, such as a secured card. If you pay your credit card on time each month and keep your balance low, your credit score will go up. Over time, you’ll build enough credit history to qualify for more and better credit.

Alternatively, you may need to use a co-signer. This is when someone with good credit agrees to take over your financing if you stop paying. However, being a co-signer can be risky, so be careful before entering into these types of relationships.

3. When you rebuild your credit

While good credit can open many doors, bad credit can close them just as quickly. If lenders see that you’ve made credit mistakes in the past, they may not want to extend further credit to you. Even if you are approved, you will often be charged much higher interest rates than other borrowers with better credit.

The solution to a bad personal credit history is very similar to no credit: you have to build — or, in this case, rebuild – your credit. A secure credit card, used responsibly, can help you rebuild your credit over time.

If you can’t wait for your credit score to bounce back, some lenders allow co-signers. Just make sure you can pay your debts, because your co-signer can be in a lot of trouble if you fall behind.

4. When you buy a house

Given the exorbitant cost of real estate these days, very few of us manage to save enough money to buy property with cash. This makes financing a necessity. But getting a mortgage isn’t just about your credit; you must also meet the income and indebtedness criteria.

In other words, if you don’t make enough money — or if you already have too much debt relative to your income — you probably won’t qualify for a mortgage. This is true even if you have perfect credit.

That being said, it is certain assistance have great personal credit. For example, the better your credit, the lower your mortgage rate will be. You may also be able to get away with a lower down payment (although this has its own drawbacks).

5. When renting an apartment

Your personal credit can absolutely impact your ability to secure an apartment. A troubled credit history may require a large deposit – or even get you flat out. But even the best credit won’t be enough if you don’t meet the homeowner’s income criteria.

At a minimum, this is usually a monthly income of at least double the rent. More often, however, you will need an income three times the monthly rent to qualify for an apartment from a major rental company.

If you are going to rent with another person, such as a partner or roommate, this may be easier to accomplish. In these cases, your combined income is generally used to meet income requirements. Some companies may also accept a co-signer who will not reside in the apartment.

Credit is important, but it’s not everything

Having good credit is undeniably important in the modern world of personal finance – and, sometimes, outside of it. A good credit history can not only help you secure vital financing, but it also helps you get approved for things like housing and utilities.

However, your personal credit isn’t always the only thing you need to achieve your goals. That’s why it’s important to take a holistic approach to your finances. This means working to increase your income, diversify your resources and manage your debt.

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