How to Build Credit So You Qualify for a Home Loan

My husband and I are completely debt free right now. However, we are wanting to buy a house in the future and I see that as quite probably requiring a loan.

What should I do to make sure that we don't get dinged for having no credit? (A problem my husband has had in the past — ended up needing his mother to cosign for him on an auto loan because he chose to go completely credit card less during college after discovering he could not handle them well)

Without open credit, you won't have a score at all. No score, no loan with any regulated lenders - hard money becomes your only option. It's as simple as that. I can get people with horrible credit loans on better terms than I can people with no credit.

In order to get a credit score, you need two open lines of credit. Three is better, because sometimes one will not be reported to one of the three major bureaus. Car loans count. Installment loans count. Those stupid "Pay no interest for twelve months" accounts count, although they really do hurt your credit. But the best thing to have is credit cards, because you usually only apply once and you can then keep them forever, giving you a long average duration of credit. Read my article on Credit Reports: What They Are and How They Work for what goes into a credit score.

What you do for this is go out and apply for two credit cards. Not store cards, unless you can't get regular credit cards. They don't need to be big lines of credit - $500 to $1000 is more than plenty. I have found credit unions to be a good place to send my clients to for this purpose, as San Diego has several excellent large credit unions, at least one of which any resident of the county can join. They may not be absolutely the lowest rate, but they're usually pretty low. Furthermore, the rate doesn't matter if you don't carry a balance, which you shouldn't. More importantly, credit unions usually have fewer gotchas in the fine print, usually no annual fee, and they want their members who want them to have credit cards, so they're more inclined to give members the benefit of the doubt.

Once per month, use each credit card for something small that you would buy whether you had the credit card or not - you'd just pay cash otherwise. No larger than 10% of your total credit line on the card. I usually pay for a meal out at a cheap family restaurant (in the range of $20 to $30 for two adults and two kids). As soon as the bill gets there, write the check and pay it off. Costs you a stamp but it builds your credit. Or you can do online bill pay if you'd rather. I've heard too many horror stories and dealt with their aftermath too often for that to be attractive to me.

If your husband has trouble with cards, keep his copies of your cards in a safe place, and you be the one who goes out and uses them. He still gets the benefits if they're joint cards.

Caveat Emptor

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