How to Use Banks to Build Credit

Most Americans are plagued with credit card debt. In fact, according to statistics released recently by the Federal Reserve, the average American household owes over $8,500 in credit card debt and that amount is growing at a rate of approximately 5% each year.If you find yourself in too much debt, tell your bank. If you admit to your bank that you are in trouble, your bank is likely to work with you to find ways of keeping you out of bankruptcy.

Instructions

1. Tell your banker if you are in financial trouble. Banks are willing to work with individuals who admit their problem and genuinely want to find a solution.

2. Be realistic with your banker. Do not promise more than you can afford to pay. Don't be intimidated. Negotiate. Your banker does not want you to declare bankruptcy--this give you a bargaining chip.

3. Stick with the payment plan you and your banker agree to. If things change and you cannot stick to the plan, TELL your banker immediately. Do not fall behind in payments. Negotiate a new plan. Do not make additional credit purchases.

4. If you have no credit and wish to establish excellent credit you may do so using what is called a Compensating Balance Loan. The way this works is simple. Deposit $500 or more into a savings account at your bank.

5. Go into your bank and ask to meet with a loan officer. Ask for a short-term compensating balance loan of $500. This allows your banker to use your $500 savings account to fully collateralize your loan. This means there is almost no risk to the bank so your loan should be quickly approved at a good interest rate.

6. Keep the $500 loan money safe. Just BEFORE the loan payment is due return the $500 you borrowed along with the few extra dollars in interest for 1 month. You have now taken out a loan and repaid it on time.

7. Deposit an additional $500 of your own money into your savings account, bringing your balance to $1,000. Ask the same loan officer for a $1,000 compensating balance loan with your savings account as collateral. Keep the borrowed $1,000 safe for a month, and then use it to repay the loan at the end of the month. You will have to come up with a small interest payment.You have now taken out 2 loans and repaid both in full and on time.

8. Ask your loan officer for an unsecured $1,000 loan. At the end of the month simply return the $1,000 you borrowed along with your interest payment. At this point, your credit will be excellent.

Tips & Warnings

• When taking out a Compensating Balance Loan tell your banker that you need the short-term loan for a wine transaction. Hand carry a bottle of wine to your loan officer when you repay your loan. This will dramatically increase your profile with your loan officer.

• Never spend any of the loan money you receive. Simply keep it safe and then use it to repay the loan at the end of the month.

• When negotiating terms for paying down credit card debt, do NOT agree to a repayment schedule that you cannot reasonably stick to. Agreeing to pay more than you can afford will not make you look good in the eyes of your banker or help to repair your credit rating.

• Once you have repaid your debt, ASK your banker to report your good standing to all three credit reporting agencies.