Playing The Game
By accepting all the credit cards you are offered, using them to purchase everything you buy and then paying them off in full and on time every month, you will soon find yourself in a position of having great borrowing power. (R1 credit rating and a high fico score). The rating system is as follows:
R0 too new to rate
R1 paid within 30 days
R2 paid more than 30 but less than 60 days
R3 paid in more than 60 but less 90 days or 2 payments past due
R4 paid in more than 90 but less than 120 days or 3 payments past due
R5 over 120 days but not yet in collection
R7 account paid through OPD or a proposal
R8 repossession
R9 bad debt, placed for collection
Do not submit too many applications in a short period of time, as this will create a flag on your file in the credit system, but do ask that your credit limit be increased periodically. The unused credit portion of each card is the amount you can borrow without collateral. For example, if you have 10 credit cards with a line of credit of $15,000 each and you owe $400 on each card, then your borrowing power is $146,000. In addition, if you have a line of credit at your bank or more than one bank, you can add those amounts to the $146,000. Should you can borrow from a bank and pay them off without default, your credit limit will increase every time. The secret to obtaining and maintaining an optimal credit rating is to pay creditors on time and not overdraw on your account or allow a cheque to be returned NSF. Playing the game requires discipline and due diligence; it is almost like a game of Snakes and Ladders: one slip and you are back at the beginning.
Depending what kind of business you are in, there may come a time when you may need money for one reason or another. Consistent and repeated borrowing can soon escalate and before you know it the interest and payments will get the better of you. However, if you want to catch a big fish you have to go into deep waters, so you must be prepared to be caught in a few storms or hurricanes or even become shipwrecked a few times along the way before you become a wise sea captain.
Its ironic that a person who may have a lot of borrowing power may be in fact more of a risk because he has over extended himself and although his good credit is still intact, may be on the verge of defaulting on his loans at anytime. However, he will be considered less of a risk than a person with a good job who has just declared bankruptcy and who is in fact a good risk, but has a bad credit rating (R9). Smart lenders have a tendency to lend not on your credit rating, but with more of an eye on your ability to pay. Those smart money lenders of course will charge a much higher interest rate some times as much as 3 or 4 times of a bank. The more inquiries that are made on your credit will lower your rating and if you are turned down for a loan your rating goes lower still.
The decision-making process to approve a loan has been taken away from bank employees and given over to the computer network. Most financial institution's computers are networked with one other and will make a determination based on how well you have played the game thus far. You may be the traditional steady-as-you-go type of person with $15,000 of borrowing power and if so, Mr. Computer will tell you what it can do for you.
Protect Your Home
Never use your home as collateral because if some unforeseen disaster occurs, the bank will foreclose. On the other hand, allowing the bank to attach some other investment that you can afford to lose is a better choice. You need your home to live in; you cannot live in an investment portfolio. For example, should an international disaster that has a negative effect on the global economy occur as did on September 11, 2001, or you suffered a tragic accident, lost your business or job, you could still borrow on your credit cards should you not have an emergency fund. If you could not pay the credit cards and subsequently the company sued you successfully, they would in all likelihood put a lien on your home but they still could not force the sale of the home. They cannot foreclose, however having a lien against your home means that if you want to sell the property, you would have to pay the credit company first. If a creditor is successful in court they have an order for judgment registered against a property. There are ways to remove this from title.