Building credit?

[MonkeyPrincess]

We have never really used consumer credit, although there are a couple things on our credit reports that aren't exactly favorable - they are old and should be able to fall off in the next year or so. 

I am looking to establish some positive things on our credit, as we would like to set things up to be able to purchase a house at some point... 

From what I read, starting with a secured credit card or two, keeping the balance between 10-30% and getting some kind of small loan would be beneficial in starting to establish some good credit. Do you think that is accurate? 

Any tips on safe companies to get a secured card from? My bank is a small community bank, and I've been with them for a few years, so I might be able to get something going there. 

Any other advice, warnings or btdt stories would be much appreciated. 

Thanks! :)

[crunchy_mommy]

I would only do this if you are going to pay the card(s) off in full each month. Otherwise you would end up spending a lot of money in interest and it wouldn't be worth it. What I've always done is charge my everyday purchases (food, gas, etc.) and then pay it off completely each month. This takes careful attention to your budget and a lot of discipline. If you're likely to end up carrying a balance, I would not use credit cards to build your credit.

Also look into the way the credit cards you're considering are reported to the credit bureaus. Most report based on your credit limit but I know Capital One (at least when I looked into it a few years ago) doesn't rate in terms of your credit limit but the maximum amount charged. So on credit-limit reports, if you charge $1K/month and your limit is $20K, then it would show you are only using 5% of your available credit. With something like Capital One, if you charge $1K/month and never more than that, it would report it as if you were using 100% of your available credit. (To kind of get around this you can make some big purchases on the cc to ramp up the "available credit" to make your percentages look better. You can actually have more control/flexibility this way but you'd have to know what you're doing.)

I would not get a loan unless you actually need it for something.

I don't know that I totally believe in "building credit" as a wise financial move, unless you plan on repeatedly needing credit in the long run. Then having good credit already would secure you better rates. But at least here in this forum, for many of us the goal is to not rely on credit and to minimize debt.

The best thing you could do to prepare for home ownership is save a large down-payment. The ideal would be 100% but if that's not possible, save at least 20-30% (for a $200K house that would be about $50K). A large down payment, combined with a large emergency fund, will serve you better IMO than a perfect credit rating and lots of debt.

[MonkeyPrincess]

Thank you for responding! :)

Yes, I plan on just using the card for gas or food or something already budgeted for and paying it off each month (up to the recommended percentage...because from what I understand, they don't want to see the pay offs as much as there is available credit?).

I definitely only want cards that are reporting to the credit bureaus. I would really only be looking at an amount of $200-$500, just to establish *something* positive on our credit...

We have zero consumer debt, no student loans, not even a car payment. We rent and have an emergency fund. We would like to purchase the home we are living in, and want to be prepared when the owner decides to put it on the market. We will have a decent downpayment within the year, but no where near 100%, and I'd just like to be able to get rates that will make the payment reasonable.

[SweetSilver]

Originally Posted by MonkeyPrincess 

Thank you for responding! :)

Yes, I plan on just using the card for gas or food or something already budgeted for and paying it off each month (up to the recommended percentage...because from what I understand, they don't want to see the pay offs as much as there is available credit?).

I definitely only want cards that are reporting to the credit bureaus. I would really only be looking at an amount of $200-$500, just to establish *something* positive on our credit...

We have zero consumer debt, no student loans, not even a car payment. We rent and have an emergency fund. We would like to purchase the home we are living in, and want to be prepared when the owner decides to put it on the market. We will have a decent downpayment within the year, but no where near 100%, and I'd just like to be able to get rates that will make the payment reasonable.

I don't know where this idea comes from, that you need to keep a balance on your card.  We have never kept a balance, and our credit is excellent.  What do we do to keep it that way?  We pay the bills on time.  And we use the card frequently.  Our visa bill is regularly around $2000 each month.  We put groceries on there, dh puts his gardening business expenses on there (not enough to justify and entirely different card.)  We put gas on there.  We use it *a lot*!

We also have no debt beyond a small mortgage.  We have never had a car loan or student loans.  Our only credit has ever been the one card and various mortgages over the years.  What we have had is many years of this kind of activity to show on the credit report.

The fact that you rent (and pay rent on time?) will stand for something.  Banks are looking far, far beyond your credit report right now.  (We are currently refinancing right now).  That is one part of it.  The down payment really is the most important piece of this for you.  The smaller your loan needs to be, the better position you will be in.  Not having car payments or student loan payments will be an asset.

My advice is to not risk racking up interest fees to keep the card at any "optimum" balance that you heard.  Use the card regularly, pay the card in full and on time every month, and start saving for a down payment.  Pay all your bills on time.  Get receipts from your landlord, if you are not doing that.

[chel]

I agree with others. Having a large down payment is key. Also dont see a reason to takeout loans just to boost your credit

[MonkeyPrincess]

I really have no idea either, because I don't use credit. Now that I will be in a position to, I wanted to set things up as best I could. I looked online and they basically said that the old idea of using a card and paying it off every month is not what creditors are looking for...they would rather see that you have the available credit and are not using it, so that's where the 10-30% came from. That's why I asked here for other people's experiences, because I was getting this from links I found on google. ;-) 

I would love to be able to have a very large down payment for the house, but we are just coming out of a few years of very difficult financial times (I was apprenticing, my husband was out of work, I'm trying to establish a small practice, my husband is making less than half of what he had just a few years ago as a mechanic) and we are just now, finally, able to be on top of things, have an emergency fund and start a small savings account. Knowing the landlord wants to put the house on the market in the next year or two, and we would like to purchase it, I would like to at least have a chance at a reasonable interest rate for the mortgage I know we will need to take out.

Thank you so much for your input! :)  

[SweetSilver]

I'm still interested that you need to carry a balance of 10-30%?  I would say we use about that every month (our card limit is something like $8000, I don't really pay attention) but we pay it off.  You are still using it if you pay it off-- I think?  I think you don't want to have a card with a $3000 limit and be maxing out that card every month, whether you pay it in full or no.

Besides, I still don't think it is worth purposefully carrying a balance on your card and paying the interest fees.  Then again, I've had much longer to play in this game that I have built up enough history to be nonchalant.  I have never focussed on our credit, but according to my insurance agent who spoke with me about this, it is almost as good as it can get.  Maybe it could be better by carrying a balance?  Who knows?  My refinancing agent seemed pretty happy about that aspect of our application, and that we have no debt other than a mortgage.  Our only possible stumbling block is our income, and I think with the amount we are looking to refinance for, this is  not an issue. So, good enough.

Anyway, good luck!  It is hard out there.  I swear, I think they are going to ask me for 2 pints of blood, a rectal exam, and a note of commendation from my 8th grade PE teacher.  It is, indeed rough.  

[crunchy_mommy]

Yeah as far as I understand it -- or at least this has worked for me, I do have excellent credit! -- you do not need to carry a balance. You do need to show a balance at the end of the month... so you want to wait until your bill is due to pay it. If you pay it off midway through the month, you won't show a balance on your statement (you could always pay part of it halfway through the month if you charged a lot in relation to your credit limit). You don't want to pay interest... so pay in full once your bill is due each month.

And I would still strongly encourage finding some way to come up with a large down payment. Without that, you have very little equity in your home, which limits your options if you run into any issues down the road. Without equity, you can't really refinance or sell in a bad economy (or get a home equity loan or whatever)... Plus you are going to have closing costs too, you need to make sure you have enough to cover all that otherwise you could end up owing more on the house than it's worth.

[chel]

Have you talked to your landlord? You both could save a lot of money by not using an agent. I would get an attorney, though.

since you have time, try going to your bank and seeing how you credit looks now. Like a pre-approval.

Try to have atleast 20% for a downpayment. As long as you have that, I don't think the interest rate would vary much unless you have enough of a downpayment to only need a 15yr loan vs a 30yr loan

[cristina47454]

Definitely go talk to your bank. My husband just recently signed up at a local credit union bcs he was looking at getting a car loan and had heard that credit unions were the way to go. While setting up an account, he found out that he has no credit history. His credit score is in the mid 700s, but the system the bank uses (equifax maybe?) doesn't acknowledge his credit history bcs I am the principal credit card holder, we have been renting our home for the past 9 years (we were homeowners prior to that, but it's too old to really count), we own our cars outright (have never had car loans) and his birthdate on Experian is 1901. 

The credit union advised him to have me make him an authorized user on my accounts, to take out a revolving loan, and to fix his birthdate (no one is going to lend money to someone who is 112 years old, lol). We are considering this the "prep" for the homeloan. I imagine that different banks work differently. This credit union uses ONLY Experian and equifax. And I think Equifax is their primary...so even with a decent credit score, Equifax says his history is not strong enough to give him decent rates. Glad we found this out NOW, and not while we were trying to close on a house!!

[Mama Amie]

We started building our credit from bad credit history (but not bad from credit card/ loan related, if that makes sense) by joining a credit union and starting with a secured loan of $2,000.  We paid it off quickly, but had to pay the interest, of course.  Essentially we bought our good credit that way.  Immediately after, we got a credit card from the bank, and have paid the full balance on time every time.  In one year, we got our credit good enough to finance a brand new car.  We plan to have this paid off within 3 years, and hope to buy land or a home within that time, as well.  It took planning and discipline, but was otherwise so simple.  

[Mama Amie]

We started building our credit from bad credit history (but not bad from credit card/ loan related, if that makes sense) by joining a credit union and starting with a secured loan of $2,000.  We paid it off quickly, but had to pay the interest, of course.  Essentially we bought our good credit that way.  Immediately after, we got a credit card from the bank, and have paid the full balance on time every time.  We now have 2 other cards (one is an AmEx from Costco).  In one year, we got our credit good enough to finance a brand new car.  We plan to have this paid off within 3 years, and hope to buy land or a home within that time, as well.  It took planning and discipline, but was otherwise so simple.  Definitely consider joining a credit union and schedule meetings with the bank people for (free) advice on how best to build/acquire your credit.

[sarafi]

If you use your card, and pay the last months balance off a week or so before the bill is due, you are likely to always show a 10-30% balance. It won't be past due, so you don't have to pay interest on anything. The fact that there is a two-three week grace period to pay off the bill, will lead you to always have a certain balance on a card you use frequently.