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Building a good credit rating
Shyfted
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I'd like to be able to buy a house sometime in the 1st quarter of 2010 somewhere in the 160,000-190,000 price range. I can afford to shell out $1,500 a month for my mortgage, but I have the small (large... huge) issue of not having any credit rating for never borrowing money outside of some small student loans from college, that I've since paid off, and never owning a credit card. I don't spend beyond my limit and I save up for all major purchases like my car and bed (it's a really nice bed) and pay with cash or my bank card. I didn't originally plan on buying my bed without a small repayment plan, but because I didn't have enough history I had to pay up front.
Job security and car payments/maintenance are not issues I have to deal with. The only expenses I have right now are rent, utilities, and food with the last two being very minimal.
Is 10-12 months enough time to build up at least a "good" credit rating?
If so then how should I go about building it? Getting a credit card and using it for most of my purchases and then just paying it off right away?
Please edumacate me a bit on how credit works.
Job security and car payments/maintenance are not issues I have to deal with. The only expenses I have right now are rent, utilities, and food with the last two being very minimal.
Is 10-12 months enough time to build up at least a "good" credit rating?
If so then how should I go about building it? Getting a credit card and using it for most of my purchases and then just paying it off right away?
Please edumacate me a bit on how credit works.
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PSN: TheScrublet
That's usually the rule of thumb. It's anywhere from 10-20%. You can buy with $0 but you're going to be paying for that out your ass in interest rates (instead of getting the low you'll get the high).
More info, http://www.frbsf.org/publications/consumer/pmi.html
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I also tend to just drop $500 or so on my utility company at a time (basically pre-paying) which tends to cover at least a full quarter of the year if not more because I hate having to write out a check and mail it every month as I can't pay online or over the phone. I'm assuming I wouldn't have this issue with a credit card company and would be able to pay online or over the phone, right?
Is there any additional cost to using a credit card to buy something even if I'm just paying it off right away?
Also, thanks a lot for the quick responses and good advice
I think it is best to have a little bit of balance on the card, if your limit is $1000 then have say $300 on it.
As for your credit rating, a lot of it depends on a couple of things.
Age: if you are young, there just isn't alot of history there.
Debt to Limit ratios: (one card that has 20% of the balance is tons better than two with 90% of the balance)
Any delinquent accounts, etc...
I went through trying to improve my score, I settled old debts that I could, paid down my credit card, etc... It takes along time to start seeing changes.
YMMV, etc...
You want to buy a house that is 3x your yearly salary. Don't listen to realtors and mortgage brokers telling you that you can afford a house 8x your yearly salary, because you can't. I just bought a house that is 4x my yearly salary and while I can make the payment on my own if I need to, im not going to be able to go out much at all with friends so Im getting a roomate.
$1500 PITI can get you a house with a purchase price of up to $225,000. That is if you get an FHA loan and put down 3.5%($7875). It mostly depends on where you live whether you should spend that high. In my area (VA Beach) you can get a much nicer home for $225,000 than you can with $180,000. But it costs an extra $300 a month.
I got lucky and apparently got a credit card at 18 that I never knew I had. I suspect my father took it without telling me and used it a couple times and payed it off. Then my student loans gave me good credit as I was never late on that. About a year ago I got a credit card and used it as a debit card(use it, pay it off). I've carried 3 balances(never more than $300) to the next statement, but everything is paid off within 40 days. I also bought a motorcycle I kept for just under a year that I never made a late payment on. All of this combined gave me a credit score of ~760 when I started applying for pre-approval a month ago.
I close on a house on the 30th. A purchase price of $173,000 with an FHA loan I have to shell out $10,114. The seller(Well's Fargo) is only aloud to pay 1% of purchase price towards my closing costs so in total to close it is $11,844.
Get a credit card(through your bank will probrably be easiest for you cause they will make it easy to see how much you have on the card and in your bank account and easy to make payments). Use it and pay it off. If I were you and I had no important things I had to take care of I would get a card and buy an item of $1000 bucks or less and pay that off over 5 months, then do it again. I would also use my credit card maybe one more time a month and pay that off immediately. This coupled with your payed of student loans + 10-15 grand in the bank will get you a house worth $200,000(if you can really afford $1500 PITI, don't forget Utils and Cable/internet and food, AND condo fee's if you get a condo).
Subtract your rent from $1500 and start throwing that money in the bank no questions asked to save up and get used to shelling out 1500 a month for "Rent".
That's like the Big Milk telling you it's good to drink a gallon a day.
See, because they sell the milk.
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Good to know. I don't have much balance on my card, but It wouldn't be there if I didn't need it occasionally.
Credit scores are much more mysterious than they should be, but basically having a paid-off card or two is good, but having 50 store cards isn't automatically 50 times better.
I'm sorry but this is not correct, especially with current lending standards. If you have poor or no credit history, just having a down payment is not enough. It costs the bank more than your down payment to go through legal proceedings to foreclose/evict you, not to mention the payments you might miss.
Hence the qualifier.
I mean if we want to be anal about technicalities:
Good credit - down payment
Good credit - no down payment
Bad credit - down payment
Bad credit - no down payment
The most likely to probably get approved are 1 and 3, but 2 isn't so far off.
Depending on your area you could get a loan for 0 down still, it's not crazy to do so either, you're just paying a shit ton more in interest, and you're just a sizable risk. Banks typically pre-approve you based on your income ( < 32% of your annual income is how they usually come up with the numbers).
No credit history is a special beast and you're likely to not get a house at all unless you're putting down > 20% if the total costs.
Now before I get called out again, this is all completely circumstantial on a whole slew of things, any advice I give is based purely on my experience and subjective experiences with myself of loved ones. I have no mingling hands in the bank industry and will not profit from you overextending yourself or you being embarrassed at a pre-approval from a bank representative. These numbers are subject to change with any economic downturn or upturn.
All of this information should be used as a guide to your decision making process.
Am I correct in that store cards are not as beneficial as a credit cards?
Store cards are credit cards, just with rewards tied to the particular store. They often have high interest rates as well.
Unless I'm mistaken, they're not treated any differently than any other revolving credit card account.
Make sure you're talking about the same thing. "Store cards" can refer to store cards, which are only good at that store, period. "Store cards" can also refer to what Six just quoted, which are normal credit cards that happen to point rewards to that store.
Also, in reference to what MichaelLC said, you don't need to keep a balance, but you DO need to keep it active. Someone who opens a card and then throws it in a safe is not going to have the same score as someone who responsibly uses their card and proves they can handle credit. Additionally, in today's current economic conditions a rash of people have had their inactive cards cancelled as banks try to reduce their exposure to loans. AMEX even went so far as to offer $300 to close your card.
PSN: TheScrublet
I was just saying earlier about store cards because some people think, "Oh, if credit is good to have, I'll open every dept. store card so my score will be fan-fucking-tastic!" That's not a good plan. If you shop at a one or two store more than others, than yes store cards are fine. Just don't fill out every form that comes in the mail.
Indeed. The same care should be taken with opening a store credit card as you'd take with opening any new line of credit. It's going to affect your credit score in a few ways (not necessarily good or bad depending on the individual). First, there's an open credit check, which is a minor ding. Next, it lowers the average age of your total credit, since it's a new account. It also increases your overall available credit, and will affect your credit-to-debt ratio, either positively or negatively depending on what your ratio was before and how much you immediately put on the card.
Store credit cards certainly make sense for some people, but yeah, no reason to open them up willy-nilly.
so I was referring to "store cards" such as a target card or Gap Card. Not a target (brand?) visa.
Is the answer still the same?
also on your second paragraph maybe that is more what I meant on some balance. I keep my card activeish. I usually carry about 30% of the max on it, (max is low) so there is still activity and re-payment happening. every month.
Store specific cards are most likely inferior to general credit cards at building credit, though they should help somewhat since it is still a line of credit to a specific store.
You shouldn't be carrying a balance like that. It probably isn't hurting your credit rating as long as you're making payments on time, but you're paying unnecessary interest. The better option would be to use the card to make purchases and completely pay it off every month as has been mentioned here. This will keep your card active, but you won't be paying interest since it's being paid off in full each month. Carrying a balance does not help your credit at all.
Keep a balance, don't keep a balance, show that you can pay over time, etc...
I think I'm going to go with the don't keep a balance route although I'll probably consult with my mom or someone she knows who is more knowledgeable about the specifics of which method is better.
Thanks for the advice, Buddies. I'm taking a lot of that into consideration and I am trying to go through my bank for my credit card. I should know in the next few days if I got approved or not. If not then I'm sure there's still a way to get one. I mean if people with horrible credit can get credit cards then I should be able to get one too, and I doubt that I've somehow become a higher risk over 5 years of not borrowing compared to when I got pre-approved offers in the mail daily.
I was going to ask some more house questions, but seriously, this is almost a full year off. I don't need to get stressed about the process of buying a house and securing the loans right now. I think I'm just gonna take it slow and look again in 8 months at where I'm at and whether I should put off my purchase a couple more months or if I can do it within the 1st quarter.
Thanks for all the help.
It is very simple. Lets say you have one credit card with a $1,000 limit. During the course of a billing cycle month, you spent $500 on the card. Then when you get your bill, you pay off the $500. Credit card companies only report to credit bureaus regarding your month end limits and balances, not intermonth. So you can go from 0 spent to 1000 spent, pay 500 and when your statement closes, you have $500 owed on a $1000 credit line and that is all they see.
So pay for things with a credit card, dont pay it until you get a bill, then pay if off in full every month. There is ZERO reason to EVER carry a balance from one month to the next. If you use credit right then you are effectively realizing the time value of your own money because you get to hold your cash for an entire month while still purchasing goods.
edit -
right now I just have a checking account. Would it make any difference at all to also open a savings account and to start putting some money in there each month?
It can, but only if you have many 1,000 to put in it.
Even .4% interest is better than none, and if it helps you seperate out what's going to bills and what's going to be saved, it's worthwhile. So if it'll help you organize your finances, than go for it.
That's a good idea, but it won't have an effect on your credit rating.
Do it anyway.
Shop around for your savings account. Somewhere like Etrade is going to give you a way better interest rate than a brick and mortar like Chase. At one point last year my savings interest rate was up to 3.3%, now I think it's down to like 1.85%.
Also pull your credit report to make sure no shenanigans are going on.
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It is, but not significantly. Having 9% or under of your utilization on all credit lines possible is preferred. So for that 1000 dollar limit, 90 or less is your best bet, and no long term balance is preferable.
I can't believe it took until page 2 for this to come out...I completely forgot about it in my post. Check your report and since you're concerned about your score, you might even want to pay the extra money to check that.
PSN: TheScrublet
Good call.
For US, it's www.annualcreditreport.com . None of that singing pirate shit. You can pull 3 free reports per year. Note it's only the report; as Scublet said they charge for the score(s).
Even if it's on the level, and they're giving away something that costs money for nothing, I wouldn't give out my info to anyone but to the "annual" site I linked as it's the Gov't, (they have it already) or the actual credit agencies.
Agreed on all counts, but creditkarma is on the up and up and doesn't require signing up for any kind of trial. I've been using it for a while.
With respect to the house, you are going to need to put something down these days. I purchased my first home last August with an 815 credit score, and the very best I could find was 5% down which came with an inflated interest rate. Just for clarification I was coming in with well over $50k in various assets ($170k home) and I still had to put something down. It's true that if you don't put 20% down you may have to pay PMI, but look into two loans, one for 75-80% and one for the rest (these are sometimes called piggyback loans) and you can avoid paying that. Again, it is going to get tougher to get one these days, but even with my second mortgage being ~1.5% more than the first, and only a 15 year note, I am still paying much less each month than I would have with PMI.
Building credit isn't hard, it just takes time. Good luck with everything.
It's funny how some people will get so pissed off at a bank fee that's $20, yet happily carry a credit card balance paying gobs more money in interest.
Anyway, you won't get a huge boost to your credit score if you're only going to have the card for a year -- my wife's score is huge because she's had one card since she was 17.
See, the whole point of the credit score is to see how you handle debt. The bank cares about you being able to pay your bills in full. That's why carrying a balance on a CC is idiotic -- the bank sees it as you overspending, since you couldn't pay your debt obligations for a month and are carrying it over to the next month. You're essentially telling the bank that you may overspend one month, be unable to meet a mortgage payment, and force them to delay receiving payment or penalize you for it.
Finally, for what purpose do you want a house? I like houses, I think owning them can be a good thing for myself, but I appreciate the responsiblity involved in owning one. Plenty of my friends talk about owning houses but really are far more cut out for renting, which I usually stress to them if they bring it up. Make sure you're buying for the right reasons, rather than some idea that it's the "grown up" thing to do. If you can make a significant amount of savings by maintaining a low rent, and don't have a list of "pros" that tilt you towards homeownership, don't jump.