How To Establish Credit Through A Local Business
Local businesses are sometimes a good way to establish credit. This is because they will usually “collateralize” whatever it is that you are buying.
“Collateral” is property that you put up in order to guarantee that you will pay back the money owed. The savings account that I talked about in an earlier article would become collateral for your loan from your bank. Collateral reduces the risk to the lender when they loan you money or let you buy something using credit.
If you default on your payments, the business will repossess (take back) whatever you bought or, if you “pledged” something else to guarantee you loan, they may actually seize the property you used to guarantee the loan and take ownership of it. There is usually law that governs the repossession or seizure of collateral.
There are two things that I need to talk about concerning establishing credit through a local business.
First, you must make sure that they report to the Credit Bureaus. If they don’t, there is no point using them to establish credit.
Second, some local business are “shady” and they will sell you things for way more than they are worth, give you credit at the maximum interest rate allowed by law, load penalties into the contract so that they can get even more money than you owe if you default, repossess or seize the collateral exactly in keeping with their contract, etc.
Used car dealers can be notorious for “hair-trigger” repossessions and so are some loan companies.
There are laws but sometimes they are hard to enforce and prosecutors are reluctant to start criminal actions against the businesses unless there are a lot of problems with the business in question… Let the buyer beware!
I think that there are three types of local businesses that you can use to establish credit. Remember, reputable businesses recognize that you live in their community and that if they give you credit and it works out they may literally have a customer for life. Being willing to give a down payment that is 10% or more of the purchase price can help a lot and you should play that card if you can afford to and if it is appropriate to the situation.
Just make sure they report to the Credit Bureaus and are not of the “shady” variety I mentioned above.
The three types of local business that I think are best to try to get credit from are:
- Department Stores – These companies are good for establishing credit because often they look at you from the “life-time customer value” standpoint. That means that they look at you more from a “future profit” than a “credit-risk today” standpoint. Plus they often have credit cards so you can prove your ability to manage money by using the credit card properly.
- Appliance and Jewelry Stores – Their business rational is quite similar to that of department stores. They will repossess the items you buy but if you hit a rough patch in the road of life will probably work with you if you communicate quickly that you are having a problem. They too will often have credit cards that give you the benefit of allowing you to demonstrate your ability to manage your credit wisely.
- Car Dealerships or Used Car Dealers – These types of businesses generally use finance companies to pay for the vehicle you buy. This may mean that they are not real interested in your long term business prospects. The reason is the finance company is the one risking the money on you and you may be just another loan to them. Hence, they are not particularly interested in helping you to establish credit.
However, there is a type of used car dealer that carries their own financing. If they are not shady and do report your account to the Credit Bureaus, they may be exactly what you are looking for. Usually they have an advertising slogan that runs something like “Buy Here… Pay Here”.
They may have a community consciousness like the first two company types in my list.
Find the owner (not a salesman) or the sales manager if the company is big enough to have one and frankly discuss the fact that you are trying to establish credit for the first time and wonder if their company would be willing to help you. You may find that they will be delighted to help you.