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Building Something Out of Nothing

  

  

  

  

  

  

  

  

  

Photo by bruce mars from Pexels

Building and maintaining a good credit score can be difficult, even for the most financially savvy among us. It’s easy to rely a little too heavily on those credit cards, or forget to set that utility bill to ‘auto-pay’. One or two missteps, and you can find your credit score heading south in a hurry. Having a bad credit score takes time to repair — depending on the severity, it could be years before you can build your score to a level that lenders will see as "financially responsible".

If you are one of the many individuals today who have a complete lack of credit, you will also find it nearly impossible to receive home financing. The good news is that having a lack of credit is not the same thing as a zero credit score — and your situation can be turned around much faster.

When you have no credit history, it simply means that you do not have any items on your credit report at all. You have not borrowed money in the past; at least, not in the last seven years. Many people who do not believe in borrowing money may not have a credit history, and while that lifestyle can help you avoid falling into bad debt, it also prevents you from building good debt - which is key when qualifying for a mortgage.

So where do you go from zero? A FICO score requires you to have at least one account that’s been open six months or longer. You’ll also need at least one creditor reporting your activity to the three major credit bureaus (Experian, Equifax, and Transunion) in the last six months.  To establish your credit presence, you might try one of the following:

  • Open a Credit Card Account: Open a card with a low credit limit, and use it only for purchases that you can pay off in full when your statement comes due. Gas cards and/or store cards (such as Target) will help you build credit as well, only not as fast. Finally, you can open a secured credit card, where you need to have money in your bank account equivalent to your credit line (want to spend $1,000 on your credit card? You need $1,000 in the bank to cover). It works much like a standard debit card — but unlike a debit, it will report your payments to credit bureaus so you can build credit.
  • Get Credit for Your Rent: You’ve always paid your rent in a timely manner; now use your good behavior to build your credit history. Check with your landlord or property management company to see if they report your payment history to the major credit agencies. If not, you can report it yourself through a third-party like RentalKharma or RentTrack.  They allow you to link your bank account and pay your rent online, free of charge.
  • Pay Off a Credit Builder Loan: Typically offered by smaller financial institutions, credit builder loans do exactly that — they allow you to prove financial responsibility and build credit by approving you for a loan. The funds are put into a savings account, and you make payments on the loan without receiving access to them. At the end of the loan term, not only do you get the money, but you likely will have a vastly improved credit score.  

By following any of these steps — and showing a little patience — you can prove to lenders and financial institutions that you are financially responsible, and a quality candidate for a mortgage. At Midwest Lending, we're here to be your home financing experts for life. No matter how far along on the path to home ownership you may be, we are always here, ready to help.