Tips to build your credit history so you can own your own home
Having no credit is as bad as and sometimes even worse than having poor credit. When you don’t have any records with one of the major credit reporting agencies, then creditors really don’t have anything to base their trust upon. In the credit industry, past performance is the main indicator of future behavior. And if you haven’t performed, how can they rate you?
That puts many people in a disconcerting loop:
- You can’t get credit without having credit history
- You can’t build your credit history until you have some credit
Yikes! That could drive even the most logical person a little mad. But there is hope.
No Cash — No Goods
One problem is that many Americans grew up with the belief that if they can’t pay cash for something, then they don’t need it, can’t have it and won’t buy it. This attitude was prevalent in previous generations, particularly those who grew up during the Great Depression. And it’s come around again.
Those of you who grew up during the Great Recession of 2008 have also become a tad leery of borrowing from banks that you weren’t sure you could completely trust — especially when it came to buying real estate.
But it’s that kind of attitude that may have dropped you into your current predicament. Unless you have a trust fund, hit the lottery or saved every extra penny for decades, chances are that you can’t afford to pay cash for a new house. And it’s something you’ve decided you want. Now.
No Cash — No Problem
The answer is to plan ahead by building your credit history. When you borrow money on a credit card for large purchases such as electronics, furnishings or a car, you leave a paper trail that will allow you, eventually, to get that new house, as long as you have the means to pay the monthly mortgage. You may need to save for a down payment, but not always.
Just remember, to buy a house, you have to borrow money from an independent mortgage lender, a bank or a credit union. They always assess risk by using your credit past to predict your credit future. But you’ve got to start somewhere, so here are a few tips to help you build your credit — and your reputation as a reliable borrower that any lender would love to meet:
- Open a checking account at a credit union or small, hometown bank. Use direct deposit if your job offers it and make regular deposits into a savings or money market account.
- Talk with one of the customer representatives. Apply for a credit card with a very low limit (like $300).
- Use that credit card every week for gas and groceries and pay off the balance every month.
- After six months, ask for a larger limit and continue to use the card, paying off the balance each month.
- Apply for a credit card through a major gas station. They sometimes are less strict than banks.
- Try to get a credit card at a major department store. They often give newcomers a start.
- Build your credit with any retailer willing to give you a chance.
Buyer Beware as You Build Your Credit
If you look, you’ll find thousands of websites offering you deals that:
- “Guarantee you good credit”
- “Promise to build your credit history in 30 days”
- “Get you all the good credit you’ll ever need”
Don’t listen to them! Believe the old adage that “if it sounds too good to be true, it probably is.” Never more is that saying more appropriate than when it comes to solving credit problems. Purveyors of these scams believe that people with no credit history are easy targets, vulnerable and ready.
Instead, empower yourself. It may take a little time, but it will be worth the effort. And while you’re taking the appropriate steps to build your credit, beware of other less-obvious snares that could trip you up in the process:
- Getting a co-signer does not improve your credit, nor does it even show as your credit. Co-signers take all the risk and get (or lose) all the good credit.
- Some small, independent retailers (such as buy-here/pay-here car lots) don’t report to the credit reporting agencies (CRA). Ask before you buy. Don’t buy anything on credit unless it is going to be reported to at least one of the major three CRAs:
- Once you get credit cards, use them regularly and pay them off each month. At least, pay more than the minimum payment every month.
- Use a credit repair company only if you have trouble sticking to a budget. Although some may offer amazing deals and even tout themselves as “nonprofit,” many are not quite what they appear. One recommended company is Best Credit RX.