Any method to quickly establish a credit history?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Myopic squirrel
Posts: 269
Joined: Wed Apr 24, 2013 11:02 am

Any method to quickly establish a credit history?

Post by Myopic squirrel »

Our 30 year old son, employed full time since graduating from college 8 years ago, has used only a debit card (BofA). He is now applying for a mortgage, only to find out that, in spite of never having any late payment charges for his debit card, rent payments, utilities payments, car insurance - anything - he is encountering difficulty because of his lack of credit history. He is now applying for a credit card (and possibly another, if he can obtain one). He has $14K in his Vanguard Accounts and $33.6 in his 403(b). Any suggestions on how to quickly establish his credit history enough to favorably impress a mortgage lender? Thank you in advance!
User avatar
prudent
Moderator
Posts: 9085
Joined: Fri May 20, 2011 2:50 pm

Re: Any method to quickly establish a credit history?

Post by prudent »

You can't really "quickly" establish a credit history. See if this link helps: http://www.nerdwallet.com/blog/tips/mor ... t-history/
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Any method to quickly establish a credit history?

Post by Phineas J. Whoopee »

No.

I'm sorry, but the answer is no. Credit histories are only meaningful over periods of a year or more, and it takes several years of on-time payments (OK, less-than-30-day-late payments) to build true lender confidence.

If the son must buy a house now, he will only be able to get sub-prime interest rates. If, as he has, he applies for yet more credit at the same time, that will be a mark against him for one year in his score, and two years on his report. Mortgage lenders, those lending large amounts, use the report to build their opinions. A $200 line of credit at Dullard's Discount Garden Gnomes might be immediately approved using nothing but a score, but big loans won't be.

The time to establish credit is before one needs it, and that fact is routinely passed over in the financial press. Responsible use of a little bit of credit increases the confidence of lenders for larger amounts of future credit.

Can the son delay the purchase? Even just a couple of years of using credit cards responsibly, charging something and paying it off on time each month with a check that doesn't bounce to avoid interest, can build a reasonably good, if not yet the best, credit record.

If the answer is no, I'd suggest the son choose a lender which offers the lowest-number-of-years of prepayment penalties, then refinance (if the interest rate environment makes it advantageous) once that time has passed.

Lenders aren't interested in how well one has used cash. They're interested in how reliably one has paid back loans.

PJW
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Any method to quickly establish a credit history?

Post by dm200 »

I don't know what can be done, but if he is dealing with a mortgage broker type person (whose compensation depends on your son getting the mortgage), perhaps that mortgage broker may be aware of alternatives to having actual credit scores/history with a credit bureau. Can't hurt to ask.

There also may be some mortgage lenders who are less dependent on actual credit bureau reports.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: Any method to quickly establish a credit history?

Post by ResearchMed »

Myopic squirrel wrote:Our 30 year old son, employed full time since graduating from college 8 years ago, has used only a debit card (BofA). He is now applying for a mortgage, only to find out that, in spite of never having any late payment charges for his debit card, rent payments, utilities payments, car insurance - anything - he is encountering difficulty because of his lack of credit history. He is now applying for a credit card (and possibly another, if he can obtain one). He has $14K in his Vanguard Accounts and $33.6 in his 403(b). Any suggestions on how to quickly establish his credit history enough to favorably impress a mortgage lender? Thank you in advance!
One of the problems you/he have is misunderstanding how a debit card is used.
It simply subtracts ["debits"] money from your own account. No one is lending you anything to pay back.
There is no such thing as being "late" with a payment.

If one tries to "charge" more than is in the account, the charge request would be denied at the time, OR if there is "overdraft protection", then the bank would be lending you the money very short term (similar to what would happen with the same account if someone wrote a check for more than the balance in the account). The costs/fees of that vary with the bank, status of the person, and the specific terms of the account.

And being on time or late with rent, insurance, utilities, etc., isn't reported the same way, as it doesn't reflect how one handles a large, long-term loan that needs to be paid back over time. Insurance gets too late? Cancelled. Ditto utilities. Rent? Evicted.

These aren't "loans"; no one handed your son a large check or wad of cash with an agreement that he'd pay it back over many years.

Point is that paying with a debit card is NOT at all the same thing as paying with a credit card, as he is finding out now.

It is unfortunate - and can be confusing - that the terms "credit card" and "charge card" (which includes both credit and debit cards) are often used interchangeably.

Also, with those limited assets, can he afford to purchase a home? Assuming that 14k was enough for a down payment and other costs (moving, etc. - it adds up), he'd then have no emergency fund, which can be especially useful when moving to a house that might have some unexpected "issues" that need repairs soon.
Or what if he needs to replace his car, or has a large repair bill on that?

RM
This signature is a placebo. You are in the control group.
mhalley
Posts: 10432
Joined: Tue Nov 20, 2007 5:02 am

Re: Any method to quickly establish a credit history?

Post by mhalley »

It will take a year to 18 months to get a credit history built up enough to get a good fico score. Does he have any score at all or a bad score? What he needs is to have someone do a manual underwriting of his mortgage if he has no score. Dave Ramsey sends his followers to Churchill Mortgage, who do manual underwriting. I have no personal experience with them, but they apparently know how to do this without having to have a fico score. They say the best chance is a 15 yr loan with 20% down. Unless he has money you don't mention in your post, he is not ready to buy a house anyway. He should have 20% down PLUS a 6 month emergency fund before he buys. Here is Churchills page on what to do to get a loan with no credit score:
http://www.churchillmortgage.com/Info/n ... score.aspx
Mike
cherijoh
Posts: 6591
Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: Any method to quickly establish a credit history?

Post by cherijoh »

Myopic squirrel wrote:Our 30 year old son, employed full time since graduating from college 8 years ago, has used only a debit card (BofA). He is now applying for a mortgage, only to find out that, in spite of never having any late payment charges for his debit card, rent payments, utilities payments, car insurance - anything - he is encountering difficulty because of his lack of credit history. He is now applying for a credit card (and possibly another, if he can obtain one). He has $14K in his Vanguard Accounts and $33.6 in his 403(b). Any suggestions on how to quickly establish his credit history enough to favorably impress a mortgage lender? Thank you in advance!
I agree with the other posters. He needs some time to build up his credit report. If he is challenged in obtaining that first credit card, he can get a secured credit card. The bank offering the credit card requires a deposit into a savings account equal to the credit limit of the card. I think after a few months of on-time payments, secured cards can be converted to regular accounts.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: Any method to quickly establish a credit history?

Post by ResearchMed »

cherijoh wrote:
Myopic squirrel wrote:Our 30 year old son, employed full time since graduating from college 8 years ago, has used only a debit card (BofA). He is now applying for a mortgage, only to find out that, in spite of never having any late payment charges for his debit card, rent payments, utilities payments, car insurance - anything - he is encountering difficulty because of his lack of credit history. He is now applying for a credit card (and possibly another, if he can obtain one). He has $14K in his Vanguard Accounts and $33.6 in his 403(b). Any suggestions on how to quickly establish his credit history enough to favorably impress a mortgage lender? Thank you in advance!
I agree with the other posters. He needs some time to build up his credit report. If he is challenged in obtaining that first credit card, he can get a secured credit card. The bank offering the credit card requires a deposit into a savings account equal to the credit limit of the card. I think after a few months of on-time payments, secured cards can be converted to regular accounts.
This makes sense, thinking longer term, for your son's financial future.

Also, once the secured card has been changed into an unsecured credit card, it will probably have a low limit.
He should make ABSOLUTELY SURE that he is not late with a single payment (anytime, but this is a crucial stage).
And then he can incrementally ask the card company to increase his credit limit bit by bit.
And then apply for a second card.

Remember: His credit score will reflect a variety of factors about his charge accounts.
Obviously, paying on time is critical. But also very important is not using too high a percentage of the "available credit". That means that if he is charging, let's say $1k per month, then if his credit limit is $2k, he's using 50% of the available credit, which is too high.
(The agencies may calculate this differently for such small sums, but maybe not.)
So as he gets his credit limit up to something like $10k, and is only using about 1-2k per month, that's a much better "percentage of credit used".

He should also plan to pay off the full amount charged each month, so the amount borrowed doesn't escalate.
Not paying the full amount each month (such as paying only "the minimum due") will lead to higher debt, and at what can be an extremely high interest rate.

RM
This signature is a placebo. You are in the control group.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Any method to quickly establish a credit history?

Post by grabiner »

ResearchMed wrote:Also, once the secured card has been changed into an unsecured credit card, it will probably have a low limit.
He should make ABSOLUTELY SURE that he is not late with a single payment (anytime, but this is a crucial stage).
And then he can incrementally ask the card company to increase his credit limit bit by bit.
And then apply for a second card.

He should also plan to pay off the full amount charged each month, so the amount borrowed doesn't escalate.
Not paying the full amount each month (such as paying only "the minimum due") will lead to higher debt, and at what can be an extremely high interest rate.
A good way to do both of these is to set up an automatic payment to the credit card from a checking account for the full balance due. This prevents you from forgetting to pay a bill, or having a bill go unpaid because you never got the statement.
Wiki David Grabiner
Topic Author
Myopic squirrel
Posts: 269
Joined: Wed Apr 24, 2013 11:02 am

Re: Any method to quickly establish a credit history?

Post by Myopic squirrel »

Folks,

Thank you all for your thoughtful replies - this has been extremely educational for our family!
takeshi
Posts: 1175
Joined: Thu Oct 03, 2013 10:02 pm

Re: Any method to quickly establish a credit history?

Post by takeshi »

ResearchMed wrote:Remember: His credit score will reflect a variety of factors about his charge accounts.
See also:
http://www.myfico.com/crediteducation/w ... score.aspx
Maverick3320
Posts: 1115
Joined: Tue May 12, 2015 2:59 pm

Re: Any method to quickly establish a credit history?

Post by Maverick3320 »

grabiner wrote:
ResearchMed wrote:Also, once the secured card has been changed into an unsecured credit card, it will probably have a low limit.
He should make ABSOLUTELY SURE that he is not late with a single payment (anytime, but this is a crucial stage).
And then he can incrementally ask the card company to increase his credit limit bit by bit.
And then apply for a second card.

He should also plan to pay off the full amount charged each month, so the amount borrowed doesn't escalate.
Not paying the full amount each month (such as paying only "the minimum due") will lead to higher debt, and at what can be an extremely high interest rate.
A good way to do both of these is to set up an automatic payment to the credit card from a checking account for the full balance due. This prevents you from forgetting to pay a bill, or having a bill go unpaid because you never got the statement.
+1 on this. Use credit cards to auto pay the utility bills, or another bill of similar size, and then have the credit card automatically paid off from a linked bank account every month. Do this for 18 months, at least. Fastest I've ever seen my credit score rise.
User avatar
ehec
Posts: 48
Joined: Wed Dec 24, 2014 4:26 pm
Contact:

Re: Any method to quickly establish a credit history?

Post by ehec »

This may be completely wrong, so perhaps wait for someone else to corroborate/dispute...

He may apply to convert whatever taxable account(s) he has with his stock broker to a margin account. This will instantly give him a line of credit equal to something like 1/2 (or maybe it's 1/4) whatever the value of the account is. Several years ago when i first became interested in knowing my credit score and its history, i noted a massive leap of around 100 points which i eventually traced back to converting my regular brokerage account to a margin account. Having a lot of available credit indicates that other lenders trust you, and at least for some range of available credit should make a positive contribution to the score.
Gronnie
Posts: 339
Joined: Sun Oct 19, 2014 2:08 pm

Re: Any method to quickly establish a credit history?

Post by Gronnie »

Add him as an authorized users to your accounts with the longest age and highest credit lines.
rixer
Posts: 758
Joined: Tue Sep 11, 2012 4:18 pm

Re: Any method to quickly establish a credit history?

Post by rixer »

Here is how some people start. Get a secured credit card. You deposit say $500 and they give you $500 limit on your credit card. After about 3 or 4 months of history, other places such as department stores will extend you credit. Now you have built up some favorable reports with a good credit history, you should be in good shape credit wise.
Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: Any method to quickly establish a credit history?

Post by Johno »

As almost everyone agrees, there's no way to 'quickly' change a credit score by a lot. But I'd second the idea for people with 20-some kids who only use debit (which is good, actually) to add them as authorized users on parents' credit cards. Assuming the parents' rating and payment habits are good, that will bring the kids' scores up nicely, though it takes awhile. It's worked in our case. They don't normally use the cards, the ones with their names are in an envelope 'open in case of emergency', where they might also be useful.
User avatar
N1CKV
Posts: 864
Joined: Wed Mar 21, 2012 8:18 am

Re: Any method to quickly establish a credit history?

Post by N1CKV »

When I turned 18 and moved out of town to attend college my parents added me as an authorized user to one of their unused credit card account. I used that card for gas only and it was available in an emergency. Since the account was ~8 yrs old it gave me all of the history retroactive - I had an instant credit history for 8 yrs at 18 years old. Not sure if it still works like that, but I had no problem getting my own card a few months later, whereas before I had been declined for a gas station card on my own.
takeshi
Posts: 1175
Joined: Thu Oct 03, 2013 10:02 pm

Re: Any method to quickly establish a credit history?

Post by takeshi »

Gronnie wrote:Add him as an authorized users to your accounts with the longest age and highest credit lines.
Lowest revolving utilization (which factors in limit) is really what matters.

Also, if a kid is made an AU the card does not have to be given to the kid.
roflwaffle
Posts: 440
Joined: Mon Mar 02, 2015 9:08 pm

Re: Any method to quickly establish a credit history?

Post by roflwaffle »

An AU is the way to go. I was added to my mom's account, which I believe was ~750, and after a couple additional years/cards I'm at 800+.
User avatar
JonnyDVM
Posts: 2999
Joined: Wed Feb 12, 2014 5:51 pm
Location: Atlanta, GA

Re: Any method to quickly establish a credit history?

Post by JonnyDVM »

Myopic squirrel wrote:Folks,

Thank you all for your thoughtful replies - this has been extremely educational for our family!
I don't have much to add other than it's sad that your son who from the sound of it is a financially responsible individual is being punished for never having a credit card. A 30 year old with a steady job, a history of paying all utility bills, and who has bank accounts should be able to get a loan for a house at decent terms IMO.
I’d trade it all for a little more | -C Montgomery Burns
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Any method to quickly establish a credit history?

Post by Phineas J. Whoopee »

JonnyDVM wrote:...
I don't have much to add other than it's sad that your son who from the sound of it is a financially responsible individual is being punished for never having a credit card. ...
I would agree that's the case if lenders were making moral judgements. They aren't. They're making hard-nosed financial judgements about where to risk their money. Maybe a morally-based system would be better, or maybe not, but it isn't the system we have right now.
PJW
User avatar
JonnyDVM
Posts: 2999
Joined: Wed Feb 12, 2014 5:51 pm
Location: Atlanta, GA

Re: Any method to quickly establish a credit history?

Post by JonnyDVM »

Phineas J. Whoopee wrote:
JonnyDVM wrote:...
I don't have much to add other than it's sad that your son who from the sound of it is a financially responsible individual is being punished for never having a credit card. ...
I would agree that's the case if lenders were making moral judgements. They aren't. They're making hard-nosed financial judgements about where to risk their money. Maybe a morally-based system would be better, or maybe not, but it isn't the system we have right now.
PJW
To me the kid sounds like a pretty low risk bet. Of course it's a numbers game for the giant lending institutions and nothing more. If
you don't have the type of hard numbers to look at that they want then you lose. I'm bias as I went thorough memorable issues getting a mortgage in 2010. Two doctors (one starting residency) with perfect credit scores asking for a home loan that was a very reasonable percentage of our monthly income and the broker backed out of our loan at the last minute because of our student debt and the specific wording of my new employment contract. The wording calling a guranteed bonus a "bonus" meant that income couldn't be counted even though it was guranteed. The process was a nightmare and if we hadn't been able to turn to a doctor loan program the whole thing would have been an unmitigated disaster. Total BS. Sometimes basing all decisions on hard numbers leads to unreasonable outcomes. After what we went through I don't know how anyone can qualify for a standard loan for a house anymore. The mortgage industry went from giving anyone a loan to swinging way too far in the other direction.
I’d trade it all for a little more | -C Montgomery Burns
LeeMKE
Posts: 2233
Joined: Mon Oct 14, 2013 9:40 pm

Re: Any method to quickly establish a credit history?

Post by LeeMKE »

Unread postby JonnyDVM » Fri Aug 07, 2015 10:16 pm

I don't have much to add other than it's sad that your son who from the sound of it is a financially responsible individual is being punished for never having a credit card. A 30 year old with a steady job, a history of paying all utility bills, and who has bank accounts should be able to get a loan for a house at decent terms IMO.
Look at this from the lender's perspective (which is the only perspective that counts). The borrower has never proven he can make monthly payments on time, and is responsible with credit.

There are two aspects to lending: the ability to repay, and the intention to repay. There are plenty of folks with sufficient means who never get their act together enough to pay their bills on time each month, and/or are irresponsible about what amount of debt they can handle on their otherwise sufficient means.

At his age, lack of credit history is a red flag to lenders. They have no measure of intention to repay. You could also co-sign the mortgage so he can reach the best rates with the mortgage lender, but I like the idea of putting him as an authorized user on one of your older credit cards too.
The mightiest Oak is just a nut who stayed the course.
Post Reply