Started From the Bottom: Building Your Credit History
Picture two average, everyday guys–early thirties, clean-shaven, decent income, both getting ready to start a family as a first-time homeowner. And both these individuals are in line at the local Suntrust to inquire about a home loan. One has long been a firm believer of the “always pay in cash” model of debt-free living, with only one credit card used very sparingly. The other has four credit cards, and while he never misses a payment, none of his cards stay “paid off” for very long. Pop quiz: which guy stands the better chance of being approved?
As counterintuitive as it sounds, the debt-free guy is going to have a tougher hill to climb. Why? Because his credit history is such a small sample size that loan officers won’t want to look at him unless he provides them tangible, indisputable proof that you don’t take other people’s money and vanish somewhere in the Hawaiian Islands.
Long gone are the days where the someone stuffing money in a mattress is better than the guy sneezing out a never-ending stream of IOUs. It’s odd and more than a little unfair, but an individual that by any definition lives “financially responsible” paying for everything up front will find it very difficult to acquire a loan when they need it most.
And they most definitely will need it. There’s not too many homebuyers in the world than can walk into a closing with a suitcase full of money handcuffed to their wrist and say, “Here. Don’t spend it all in one place.” To purchase a home in today’s world, going into some form of loan debt is practically a foregone conclusion.
So to live comfortably you’re going have to find a way to get your mitts on a solid credit history. Understanding how to get a credit history is child’s play: get credit! But getting that credit? That’s where the fun starts, and where one of life’s most hilariously warped Catch 22s rears its ugly head.
How exactly do you start getting credit? Get a credit card. How do you get approved for a credit card? Well…you’re going to need a credit history. See the conundrum here? The Circle of Life isn’t always as uplifting as the Disney song claims it to be.
Building a credit score worthy of a mortgage takes time, so the earlier you can get started the better off you will be. By early, I mean right out of school, just cashing in your first part-time paycheck early. Not all credit cards are created equal, and today some have become incredibly lax in their approval criteria. Just because one card rejects you for lack of a history doesn’t mean they all will. You’d be amazed what some companies factor into your “credit history.” Even without a credit card, you still can still be accepted on the basis of something as arbitrary as a gym membership or student loan.
You’re not going to have a whole lot of spare money to throw around at this stage in your life, so you’re going to have to start small and start responsibly. Apply to one or two low-limit, low interest cards and treat them like a cheap substitute for a debit card–pay them off immediately.
Choose your cards wisely, and be frugal with your applications. If you apply for too many in a short span of time, you’ll be penalized with a knock against your credit store. Credit cards through your bank are a wonderful first option, since your bank will approve you based on your financial history with them alone. Bank credit cards also typically offer a secured line of credit, which will take any overdue payments directly from your account. It’s a low-risk option that isn’t going to carry much weight on a credit history report (especially since normal credit cards are unsecured–making on-time payments mean much more about your ability to meet deadlines), but you’ve got to start somewhere–and when you’re still used to how credit system work it’s a great way to get your bearings.
Store credit cards are also a decent option. Most of them have a fairly low credit limit, lenient approval criteria, and best of all usually come with some kind-of buyers’ incentive. Shop at a certain store all the time, card or no card? Go ahead and take advantage of their sign-up benefits which could include everything from 25% off entire store purchase to gift cards to 90-day no interest periods. If you were planning on being a regular shopper anyway it’s a no-brainer, and you’ll be building your credit in the process. Just don’t get too trigger-happy–everything has a credit card these days, and if you open too many you could dig yourself in a hole of debt faster than you can say “Where do I sign?”
If you’re doing some research on boosting your credit history faster you may run into some wacko giving out crazy advice such as taking out a small loan from your bank or buying a car advertising “No Credit Needed!” Avoid these tips like the plague. Getting a loan for sake of getting a loan is ludicrous–its affect on your credit would be minimal at best and you’d be stuck handing out free money in the form of interest rates. A good credit history doesn’t have to cost a dime.
Working to establish a good credit history early can potentially save you thousands of dollars down the road. Not only will you be accepted for a mortgage easily, but most companies will offer you significantly lower interest rates that you would get otherwise. Start early, and when you’re getting ready to close on your first home be sure to invite me to the housewarming party. I can mix a mean Old Fashioned.
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