Monday, May 24, 2010

Help, I have no credit! Part I

From the Counselor’s Corner

By Toby Smith

Help, I have no credit! Part I

Jill came to Family Services Inc., first-time homebuyer class with one goal–to get into position to buy her first home. She had been renting for 10 years, had a great job, and money saved for a down payment. It was definitely time to go forward. Unfortunately, a large circumstance was blocking her path—Jill had no credit history, which meant she had no score.

While growing up, her parents had advised her—wrongly—to never use credit and to pay cash for everything. Jill listened to her parents’ advice, but now she is realizing that she should have made some effort to establish credit on her own.

Jill is not alone. According to thismatter.com, a financial education website, as many as 50 to 70 million people have no credit history. Often referred to as “thin-file” customers, folks with no credit can face substantial challenges with respect to securing financing for cars, homes, and other big ticket items.

Does this mean that Jill’s dream of becoming a homeowner over? Absolutely not!

She has two choices: Start using credit now and began building a traditional credit file with the big three credit reporting agencies, Equifax, Experian and Transunion, or develop an alternative credit file that will be catalogued by an alternative credit bureau. Let’s look at the path required for both so we can help Jill make a good decision.

With no score on file, Jill can begin building a credit score immediately by obtaining a secure credit card. This product typically requires a down payment or a deposit in a secured savings account. Once the money is secured, the customer receives a credit card with a credit limit equal to their deposit amount. The goal is for the customer to use the card once a month for purchases that total no more than 30% of her available credit and to pay it off. After 30 days, a score will begin to formulate. Since Jill is just starting, she will probably need a good four to six months of consistent activity.

On the other hand, Jill can turn to a company such as PRBC, Payment Reporting Builds Credit, which, for a fee, will verify that she had paid rent, utilities, cable, and other monthly bills. Once a file is established, PRBC will begin to compute a score that will be recognized and accepted by mortgage lenders. What sort of information will PRBC collect? Rent, cable, and utility bills, just the sort of things that Jill has been paying faithfully over the past 10 years. Jill is still not keen on using credit so she is going to research PRBC very carefully before she decides.

Next week, we will reveal Jill’s decision.

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