Have Big Plans? Here Are 5 Times Your Personal Credit May Not Be Enough

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The finance world doesn’t – entirely – revolve around personal credit.


Key points

  • Having a personal credit history is very important, but it’s not always enough in every situation.
  • Business loans can require establishing business credit separate from your personal credit.
  • Not having enough credit history or having poor credit history may mean you need a cosigner to help you get financing.
  • Some situations require more than credit – they also require cash.

It’s hard to overemphasize the importance of credit in today’s financial landscape. Everything from personal loan applications to cellphone contracts can require a credit check. And a great many things become quite a bit harder 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 a few common scenarios where you may not be able to rely on your personal credit alone.

1. When you need business financing

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

But your business will also need to build its own credit. Many types 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 isn’t quite as simple as establishing personal credit. While you can build personal credit with a credit card and time, establishing good business credit requires more hands-on effort. In the long run, though, that effort can really pay off in easier financing, better loan terms, and better vendor relationships.

2. When you have limited credit history

One of the great catch-22’s of finance is that you often need credit to get credit. Lenders like to see that you can responsibly manage credit before they extend more credit to you. As such, it can be a challenge to get new credit while you’re still in the process of building your credit history.

There are a few ways around this hurdle. The simplest way to build up a thin credit file is to get a starter credit card, such as a secured card. If you pay your credit card on time every month and keep your balance low, your credit score will grow. Over time, you’ll establish enough credit history to qualify for bigger and better credit.

Alternatively, you may need to use a cosigner. This is when someone with good credit agrees to take responsibility for your financing if you stop paying it. Being a cosigner can be risky, however, so be careful about entering into these kinds of relationships.

3. When you’re rebuilding your credit

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

The solution to having a poor personal credit history is very similar to having no credit: you need to build – or, in this case, kingbuild – your credit. A secured credit card, used responsibly, can help you rebuild your credit over time.

If you can’t wait for your credit score to rebound, some lenders do allow cosigners. Just be sure you can pay your debts, as your cosigner can get into a lot of trouble if you fall behind.

4. When you’re buying a house

Given the sky-high cost of real estate these days, very few of us manage to save up enough money to buy property in cash. This makes financing a necessity. But getting a mortgage loan isn’t solely about your credit; you also need to meet income and debt qualifications, too.

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

That being said, it definitely helps to 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 (though this has its own drawbacks).

5. When you’re renting an apartment

Your personal credit can absolutely impact your ability to get an apartment. A troubled credit history can require a large deposit – or even get you turned down flat. But even the best credit isn’t going to be enough if you don’t meet the owner’s income qualifications.

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

If you’re going to be renting with another person, such as a partner or housemate, then this can be easier to accomplish. In these cases, your combined income is typically used to meet the income requirements. Some companies may also accept a cosigner that will not reside in the apartment.

Credit is important – but it’s not everything

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

However, your personal credit may not always be the only thing you need to accomplish your goals. That’s why it’s important to take a holistic approach to your finances. This means working to grow your income, diversify your resources, and manage your debt.

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