This is a great post on establishing credit. Like Gene, I am seeing lots of folks who are trying to buy that have very "thin" credit profiles.
Please note: DO NOT PAY OFF OLD COLLECTIONS prior to speaking to a credit knowledgable lender. This may delay your purchase by bringing an old negative account current. Although it seems counter-intuitive a paid collection with a date of last activity (DLA) within 30 days affects credit scores more negatively than an old collection account with a balance.
Great Job Gene! Between you and Larry Bettag, I may never need to write about credit again!
Maryland Mortgage Mama
Credit:Who Needs It? Why is it Important?How do you Establish it?
I've been receiving more and more inquiries from young potential Home Buyers as of late. That's reason for celebration, as I believe now is a great time to enter the housing market. With home prices still affordable and interest rates so low, there truly is a golden opportunity for young Buyers.
But with the growing number of young Buyers, I am also seeing a larger number of hopeful clients with what is deemed as insufficient credit "histories". That can mean several things, but typically the result is lower credit scores or no credit scores for these hopeful clients.
I also see this issue arise with individuals coming out of Bankruptcy, or for those that always pay cash for their purchases.
The bottomline is, if there are no open accounts of any kind for credit cards, installment loans, personal loans, or student loans, the Credit Scoring System has no way to judge their credit "worthiness". They simply have no spending or payment history on which to base a credit score.
So how do we proceed with a potential Home Buyer, should this be the case?
Establishing credit is not a difficult process. In this day and age, credit is also vitally important, as credit runs our lives ... or at minimum, affects it greatly. Below are a few tips and clues I supply my hopeful Home Buyers when they wish to establish credit and a credit history:
* Open up a credit card (known as revolving debt) with a modest borrowing limit. Major retailers and gasoline companies are two good examples of this type of debt.
* Use the newly-established credit card by charging purchases within your budget constraints. Pay the balance on time and in full each month.
Note: I recommend that first-time credit users open only one or two credit lines to begin with. Take small steps. Learn to handle your credit wisely. Crawl before you walk.
* If you do not pay off the balance in full each month, keep your credit card balance(s) below 50% of the credit limit. (This is better for your credit. Likewise, balances kept below 30% and 10% of the limit, raise the scores even more.)
* Never close out old accounts, should you have them. Keep them open, even if you do not plan on using them. Remember, the longer you have had a credit profile or the longer the credit history, the better the scoring impact will be.
* Consider using a co-signer to establish a credit account. Lenders consider the co-signer's credit as existing credit. (Note: Co-signing is not without risk, so consider this action carefully.)
* Always make sure prior to taking out new credit or initiating a new credit card, that the company utilized reports to the Credit Bureaus.
Should you be someone that suffered through a Bankruptcy or Foreclosure ... or had other credit issues, you might have been turned down for credit or credit cards. In those cases, try opening a "secured" account with a credit union or credit card company. A "secured" account is one where you deposit cash ($250, $500, $1,000) with the credit company, as collateral for a credit card.
Use the card as you would any other ... paying it off in its entirety each month. This creates a "timely payment history" and lays the groundwork to build credit scores.
If in doubt as to how to proceed in establishing or restoring your credit, contact me prior to taking action. And as always, whether just beginning your pursuit of good credit and credit scores or as part of your ongoing efforts, monitor your credit and credit scores, either by visiting www.annualcreditreport.com to receive your one FREE credit report per year (they report credit, but not credit scores) ... or again, by contacting me. We'll work together to establish ... repair and improve ... and monitor your credit safely and wisely.
* Hoping to establish good credit? Dreaming of Buying a Home in Will County or elsewhere in Chicagoland? Contact me today! I'll put my 35+ years of mortgage experience and expertise to work on your behalf.
I can be conveniently found at any of the following:Direct: 815.524.2280Cell: 708.921.6331eFax: 815.524.2281 Skype: 630.219.1316You are Invited to Follow Me atany of the Social Media below:
If you are considering purchasing a home in Maryland and want to be sure you are mortgage ready, my brother Tony and I will be happy to help! We help to make the mortgage process a pleasure!
If you already own your home, we are happy to provide a no-cost mortgage review to help you to determine if refinancing may be in your best interest. Please contact me at 410-960-2061.