Credit: Who Needs It? Why is it Important? How do you Establish it? (2024)

Credit: Who Needs It?
Why is it Important?

How do you Establish it?

I've been receiving lots of inquiries from young potential Home Buyers as of late. Continued lowmortgage interest rates provide a good window of opportunity to buy for many home buyers.

But with the growing number of young Buyers, I'm also seeing a larger number of hopeful clients with what is deemed as "insufficient credit histories".

That can mean several things. But typically the fallout is lower credit scores or no credit scores for these hopeful clients.

I also see this issue arise when individuals are coming out of Bankruptcy, or for those that always pay cash for their purchases.

The bottom line is though if there are no open accounts of any kind for credit cards, installment loans, personal loans, or student loans, theCredit Scoring Systemhas 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?

In this day and age, credit is vitally important, as credit runs our lives ... or at minimum, affects it greatly. Establishing credit is not a difficult process.

Below are a few tips and clues I supply my hopeful home buyers when they wish to establish credit and 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 aco-signerto 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 theCredit Bureaus.

Should you be someone that suffered through a Bankruptcy orForeclosure ... 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.