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Q: I’m in the process of buying my first car (researching, calculating finances) and I wanted to ask what your advice would be as I currently have no credit history. After I buy a car, I’m going to start looking for a home.
How do I best establish my credit? Alternatively, are there other options available to me so I can purchase a car or home outright or take out a loan without having a credit history?
I would greatly appreciate any advice.
A: It feels great to achieve a financial goal, whether that’s buying a car, leasing an apartment or buying a home.
But here’s what you have to know: If you opt to finance or lease your vehicle, those debt payments may reduce the amount of money you can borrow for a home purchase. And, if you buy or lease an expensive car, that could reduce the cash you have available for your future down payment.
On the other hand, if you buy a home first and a car later, you’ll still be able to buy a really nice car because auto lenders have different loan requirements than mortgage lenders.
So, if you’re set on buying or leasing the car before the home, you’ll need to factor what your monthly cost will be for this car into your long-term home buying equation. Let’s say you decide to lease or finance a $40,000 car. That lease or finance arrangement may last five or more years. During that time, your monthly payment will likely reduce the amount you can borrow for a new home.
While we’re not telling you to avoid an expensive car, and we encourage you to make sure the car you get meets your needs, you may want to choose a less expensive option or model so that you can achieve your home buying goal sooner.
Now let’s address the issue of your credit history, or complete lack thereof. In 2016, the Consumer Finance Protection Bureau (CFPB) published a report that indicated “26 million Americans are ‘credit invisible,’ ” meaning that about one in every 10 adults either has what’s known as a “thin” file or no credit file with one of the three nationwide credit reporting companies. According to the report, “Black consumers, Hispanic consumers, and consumers in low-income neighborhoods are more likely to have no credit history or not enough current credit history to produce a credit score.”
So, it’s possible you don’t have a credit report. You should visit annualcreditreport.com and try to download your credit reports from each of the three major credit reporting bureaus: Experian, Equifax and TransUnion. Through April 2021, each of the credit reporting bureaus are offering a free weekly credit report. You can also sign up for a free account at Equifax.com, Experian.com and Transunion.com, which will give you access to their educational credit scores, the Vantage Score or your FICO credit score, in addition to your credit reports, which will be helpful indicators that your credit history is starting to form.
If nothing turns up, then you’re right: The bureaus don’t have enough information on you, a common enough occurrence for those just graduating from college (without debt) and entering the workforce.
You can start building your credit by applying for a secured credit card with a local bank (choose one where you already have a savings or checking account) or a gas card in your own name. You may not get much of a credit line, but within six months you should call and ask to increase that line of credit. Use the secured credit card or gas card a few times each month, and immediately pay off the balance.
After six to 12 months, you should start receiving credit card offers. But if not, you should apply for a regular credit card that many banks offer to young people who may have no credit or poor credit.
The best thing you can do is to pay your credit card bills diligently, even if you pay them off weekly or twice per month. There is no extra fee for pre-paying what you owe, and what you’ll find is that by paying down your balance to zero, not carrying a balance and paying your bills on time, the credit history you build will be very positive.
Some consumers are unaware that these educational credit scores are different from the credit scores lenders pull when you’re buying a car or a home. While they’re not the exact score, they are a gauge you can use to see how you are doing and whether your credit score increases or decreases over time.
How you handle your debt and payments is a very important part of your credit history and could affect your credit scores. For example, you shouldn’t use more than 30% of your maximum available credit limit.
Let’s say you have a credit limit of $1,000 and you charge $800 on your credit card. You will have used up 80% of your maximum available credit, which could indicate risky behavior to a creditor. Try to keep your credit utilization ratio as low as possible, preferably under 30%. If you do have a larger charge, try to pay it off as quickly as possible.
The best thing you can do for your credit is make all of your payments on time, and preferably in full. If you fail to make the minimum payment, you’ll pay late fees and other charges, and your late payments will be reported to the credit bureaus. Late payments can lower your credit scores. So, be sure to make those new car payments on time.
As you add credit and make your payments on time, your credit scores will begin to rise. Use that time to save for your future down payment.
For more information on how to build your credit, check out Ilyce’s Credit 101 series at ThinkGlink.com or visit the Consumer Finance Protection Bureau at CFPB.gov.
Contact Ilyce Glink and Samuel J. Tamkin through her website, ThinkGlink.com. (c) 2020 Ilyce Glink and Samuel J. Tamkin