Want your own home someday? Start by saying, 'Charge it'

About 50 million people lack the credit record necessary to buy a house.
By: Lew Sichelman: Los Angeles Times
They are mostly immigrants and minorities who, for one reason or another, pay their bills in cash. But the ranks of the "credit underserved" cut a much wider swath, including college students and those recently divorced or widowed.

You don't need perfect credit to become a homeowner, but you do need good credit. And it's never too late to start establishing a good credit record or improving the one you have.

For starters, establish a budget and stick to it. "No matter what their income, everyone must live within his means," says Sherene Costanzo, vice president of Credit Consultants Inc., a Margate, Fla., company that helps people restore their tarnished credit histories.

Your budget is not only your spending plan, it's your savings plan too. But for it to work, it must be realistic and accurate. List your monthly income, but don't overstate it by including, for example, overtime or bonuses. List your monthly expenses, including whatever you spend on entertainment.

And be sure to remember the bills that aren't due every month, such as your automobile insurance.

Now compare what you earn with what you pay out. If you have a positive balance and can put some money away in savings, you are on your way to homeownership. But if you have a negative balance, you are living over the edge and must adjust your spending habits.

Consumer Credit Counseling Services, a nonprofit, nationwide agency, operates on the 70-20-10 rule: No more than 70% of your income should go to living expenses and no more than 20% should go to your creditors. The remaining 10% should be put in savings.

If you don't already have one, the next step is to open a checking account. Without one, it's more difficult to provide creditors with a record of how you manage your money. Many checking accounts are free these days, making them less costly than paying with a money order or using a neighborhood check-cashing store to cash your paycheck.

Savings accounts are important too, because the best way to improve your overall financial health is to save money every month. Put the money in a savings account and don't touch it unless you need it for an emergency.

Pay your bills on time, making sure they arrive before their due date. This is the best way to build the good credit you'll need to qualify for the lowest possible rate on a home loan.

Paying bills late is a sure way of damaging your credit record. Not only will late fees eat up your hard-earned cash, but some creditors also report customers if they miss the due date by a single day.

Others wait until you are more than 30 days late before reporting you to the credit bureau. Either way, a late payment or two will hurt your chances of getting a low-rate mortgage.

If you are just starting out, you'll find it easiest to obtain a credit card from a department store or gasoline retailer. Even though these come with the highest interest rates, you should use them frequently so you can demonstrate you know how to handle credit, says Maxine Sweet, vice president of public education at Experian, one of the big three credit bureaus. But pay it off in full every month.

After you do that for several months, it should be easier to obtain a national bank card from Visa, MasterCard or American Express.

Other ways to start building your credit file are to buy an automobile and make payments on time, or take out a secured credit card in which you deposit an amount with your bank, say $250, and then use your card up to that amount. Activity on secured cards is reported to the three credit bureaus as conventional credit cards.

If you are married, make sure some accounts are in both your names, so you and your spouse can build a credit history.

There is no rule regarding the optimum number of credit cards you should have. Tanisha Warner, spokeswoman for Consumer Credit Counseling Services, says all you need is "one or two major credit cards."

Nick Jacobs, spokesman for the National Foundation for Credit Counseling, suggests one bank card, either debit or credit, and one department store card.

A third opinion, this one from Ginny Ferguson, an expert in credit scoring, says the numerical programs lenders use to rate borrowers for risk, make it preferable to have one or two national cards, a couple of department-store cards and even a gasoline card.

Why? Because scoring systems look for how well you handle "a nice, balanced mix" of credit, Ferguson explains.

One thing the three experts agree on is that you should pay all your debts on time.

If you find you can't meet all your obligations, call some of your creditors and see if they will reduce your payment or allow you to be late. Many are willing to work with their customers, but they can't if you don't notify them in advance that you are having problems.