How to Establish Good Credit for a Home Loan
If you’ve never had credit in your own name, it can be difficult to get a car loan or credit card. Having no credit history can be as much of a problem as having a bad credit history. Students, other young people, and newly divorced or widowed women who have always obtained credit jointly with their husbands often find themselves in this situation.
It seems like a vicious circle: you can’t get credit because you’ve never had credit, but you’ve never had credit because you can’t get credit. What’s a person to do?
Don’t despair. Here are a few tips to help you establish credit in your own name.
- The best way to establish a credit history is to apply for a small loan or line of credit from your local bank or a credit card from a local department store. Ask whether they report to a credit bureau. If they don’t, having the card or loan won’t help you establish credit.
- To get a credit card without a cosigner, you must be at least 18 years old and have a source of steady income. Gas cards are relatively easy to get. Apply for one and use it to establish credit, but pay it off every month to show that you can pay your bills responsibly.
- If you can’t get a small loan or gas or department credit card on your own, try to find someone to co-sign for you. Again, make payments regularly and on time.
Â Increase your chances of getting the loan you’re applying for by coming up with a large down payment. If you don’t have the cash, consider borrowing from a family member.
- If you don’t have a checking account, open one. You have very little credibility with lenders if you don’t have at least a checking account and preferably a savings account as well.
Just as importantly, be sure not to overdraw your bank account. Bouncing checks sends a signal to potential lenders that you can’t manage your daily finances and are therefore not a good credit risk.
- Know what lenders and credit card issuers look for when issuing credit. There are other factors that affect credit approval besides just your payment history, such as how often you move and how often you change jobs. It also helps if you’ve had an apartment or utility in your own name. If you don’t have a telephone number in your own name, you may find it more difficult to get credit.
- If worse comes to worst, you may find it necessary to get a secured credit card. These cards require you to deposit money in an account to secure the loan or credit limit, and they often have fees and higher interest rates. If you default on your payments, the lender takes the money from your account. After a few months of making payments on time on the secured credit card, you may be able to obtain a regular credit card. Remember to make sure the company reports to a credit bureau before applying for a secured card, or the card won’t help you establish a credit history.
Before you apply for a credit card or car loan, get your ducks all lined up. Think like a lender. Applying to a number of credit cards in a short period of time can decrease your chances of getting approved. Lenders see this activity on your credit report and steer clear because they think you’re getting in over your head, so pick and choose carefully and have a plan of action.
Being rejected for credit can also look bad. Apply only to cards whose requirements you are likely to meet. Read the small print and call the company to make sure your income and other factors qualify you for the card. Just because you get an offer in the mail doesn’t mean you qualify.
With careful planning and a little knowledge of how lenders issue credit, you CAN establish a credit history fairly painlessly. There are many businesses waiting in line to take advantage of you by charging exorbitant fees or interest rates, so be careful out there. For a Free Copy of your credit report visit www.annualcreditreport.com. This site is provided by the three major bureaus; Experian, Equifax, and Transunion. You can get your free report once a year from each of the three bureaus. The only problem with this website is that you will not get your FICO scores, just what is on your report.
If you would like a Free Analysis of your credit situation for the purposes of obtaining a home loan, please feel free to contact me or fill our my contact form on this website. I will be more than happy to counsel you and to help you put together a plan to develop good credit or restore bad credit.
John R. Thomas – NMLS 38783
Certified Mortgage Planner – Primary Residential Mortgage, Inc.
302-703-0727 DE Office / 610-906-3109 PA Office / 410-412-3319 MD Office
42 Reads Way, New Castle, DE 19720