Tuesday, October 3, 2023

A road map to homeownership for consumers with thin credit files



Homeownership is an important life goal and milestone for many Americans, providing meaningful benefits beyond building wealth and financial security. But today in the United States, 26 million adults are effectively blocked from achieving homeownership because they are “credit invisible,” meaning they have no record of borrowing or repaying money through loans, credit cards or other forms of consumer credit. Without a credit history or credit score, these consumers are missing key tools mortgage lenders use to help people achieve homeownership.

There are good reasons some people are credit invisible. According to the Consumer Financial Protection Bureau more than 10 million of these consumers are younger than 25 and are likely earning an income for the first time; they’re just beginning adult life, so it stands to reason that they don’t have the long financial history that comes with time.

On the other end of the spectrum, spending tends to decline after a consumer retires, and many older Americans who might have had a strong credit score in the past can see their credit file shrink. In most cases this isn’t a problem, as they are not seeking to purchase a new home or opening other kinds of credit accounts.

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Another group with little or no credit history is immigrants who might have had credit accounts in their former country, but that previous credit history doesn’t transition over to the U.S. system.

Regardless of the reason, consumers with limited to no credit history will find it harder to get loans, and when they do they are likely to pay more in interest and fees.

While your credit history is certainly important, lenders are also looking at whether an applicant has enough income to repay, the consumer’s total amount of debt and if they have enough cash on hand for a down payment. So establishing a strong credit file isn’t a silver bullet — but it can really help. Here are five ways consumers can become credit visible:

First, become an authorized user on a friend or family member’s credit card. As an authorized user, you get your own card and share the primary account holder’s credit limit and payment history. The important thing is to make sure both you and the primary account holder make on-time payments and don’t max out balances. With responsible management, this positive payment record will appear on your credit reports and can improve your credit score. (And make sure everyone understands that this is a joint account, meaning all users are responsible for charges even if the other person made the charge).

A second option is to leverage your personal recurring payment data. Today, consumers can report their payments for rent, utility, cellphone and streaming service bills to the three nationwide credit bureaus (Equifax, Experian and TransUnion) and see positive impacts to their credit scores. Services like Experian Boost help you do this automatically and across payment types; there are also rent reporting services available.

Third, apply for a secured credit card. Many banks offer this option, which allows consumers to pay a cash deposit as collateral that typically becomes their credit limit. From there, consumers can charge purchases to the card and make regular, on-time monthly payments and start to build a positive payment history that is reported to the nationwide credit bureaus.

Another option is to apply for a credit-builder loan. Many credit unions offer these types of loans, and they can be great for both building a consumer’s credit file or repairing damaged credit. Consumers borrow a small amount that the lender then places in an account they cannot access. After the consumer pays off the loan through a predetermined set of payments, that loan is then turned over to the consumer. Before applying for one of these loans, however, make sure your lender reports payments to the credit bureaus.

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Finally, immigrants who are faced with building a credit score from scratch upon arriving in the United States have a fifth option. Applying for a credit card through Nova Credit converts a consumer’s international credit history into a U.S. credit score. While this service doesn’t yet work for immigrants from every country, it can help establish a U.S. credit file.

It’s important to note that once you establish a credit file, it can take up to six months of payment history for a credit score to be calculated. So adjust your home-buying and mortgage loan application timeline accordingly.

Outside of these tangible steps, credit invisible consumers should also consider working with third-party credit counseling services like Credit Builders Alliance. These counselors can provide financial advice and help consumers build their credit step by step.

Consumers thinking about buying a home should regularly be checking their credit reports long before applying for a loan. Consumers can do so for free at annualcreditreport.com (as often as weekly through the end of 2022). Make sure to use the correct link – this is the official site for free reports that federal law requires the credit bureaus to make available.

Building a healthy credit file can take time. But there are tools available to get on track.

Francis Creighton is the president and CEO of the Consumer Data Industry Association, based in Washington, D.C.

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