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Q: I am a recent college graduate with no student loan debt and no credit card. I want to buy a house. What can I do to quicky build a credit profile so I can qualify for a mortgage? And can I do this without taking on debt?
A: First, congratulations on graduating college without student debt. Second, it will be easier than you think to build the credit profile you need to qualify for a mortgage.
For some insight into your issue, I spoke with Doug Erickson, a mortgage broker with Vinings Mortgage. (Click here to see Doug's profile.)
Doug said that underwriters are able to work up a credit profile even on thin credit files. (A thin credit profiles is one with limited credit history.) Partly, they can do this by looking at your payment history on bills (such as rent and utilities.
However, they also will need some help from you.
What Doug suggested is that you set up some credit lines to show responsible usage of credit.
Establish Some History of Credit Usage
Even though underwriters are allowed to look at your history of bill payments, that is not always enough to establish a credit score that will meet the minimums required for a mortgage.
So you will also need to establish some history of responsible credit usage.
Doug's suggestions were to take out a secured credit card and open a department store card.
Why a secured credit card? Well, they are easy to qualify for. And there are good ones out there with no annual fee and which provide a path to getting an unsecured card.
Why a department store card?
Doug says that these too are easy to get. But he does warn that they carry high interest rates. So make sure to pay your balance in full.
Another alternative to a department store card is one of these recommended cards geared for people like you - those trying to establish a credit history. Though many of these cards do have annual fees, they also can be used pretty much anywhere. Which makes than a lot more versatile.
What You Are Trying to Accomplish
There are several factors that go into your credit score.
The factors are (including the percentage they are weighted in determining your score):
- Payment History -- 35%
- Credit Utilization -- 30%
- Length of Credit History -- 15%
- Credit Mix -- 10%
- Extent of New Credit -- 10%
To learn more about each factor composing your credit score, you can find a complete explanation in this article.
Since you will be new to credit, there are some factors that will not immediately look great. But we are not trying to get you a score in the 800s.
So what you are trying to accomplish is to show a good payment history and credit utilization.
This will take about six months. Which is pretty quick in the grand scheme of things.
Over that time, you will pay all your balances in full. And you will never take out more than 30% (and hopefully less) of the available balance on your cards.
This will help establish solid payment history and credit utilization (i.e., that you do not overextend yourself on credit).
These steps will not only help you establish a strong footing for your mortgage. They will also make it easier to qualify for extended financing from furniture stores, home improvement stores and more.
And as a new homeowner, you may well want to take advantage of zero percent financing offers.
The Bottom Line
It is great that there are people managing to graduate college without a mountain of debt. And I admire your desire to avoid the temptations of credit card debt.
However, credit cards can be a necessary evil to help build a credit profile necessary to qualify for mortgage, car loans and more.
In fact, many insurance companies will offer lower rates to those with better credit.
So better than avoiding credit cards, we recommend using them responsible. Pay your bills in full each month. Never charge more than you would if you were paying by cash. And maybe even look into taking out a great rewards card.
Luckily for you, new mortgage rules make it easier than ever to build a credit profile necessary to qualify for a mortgage. And with a little additional planning, you can establish the necessary credit history to achieve a sufficient score.
Doug and I wish you the best of luck in your home shopping!