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By LIZ PULLIAM WESTON
Build Good Credit, Then Go House Hunting
Dear Liz: How can I build credit so that I can buy a house?Answer: The rate and terms you get on a mortgage will depend largely on three factors: your FICO credit scores, your down payment and your income.
To improve your credit scores, you need to get – and use – credit. Credit cards are a good way to build your credit history and your scores. So are installment loans, such as auto loans and personal loans.
If you don't currently have a credit card or a loan, apply for a secured card. You can find good ones at CardRatings.com or Bankrate.com. To get a secured card, you make a deposit at the issuing bank (typically $200 to $1,000) and in return get an account with a line of credit in the same amount.
You'll want to use the card lightly but regularly, and pay your bill on time and in full every month. Don't use more than about 30 percent of your credit line at any given time, and don't believe the myth that you need to carry a balance to improve your credit. That's hogwash.
Choose a credit card that reports to all three credit bureaus and that converts to a regular, unsecured credit card after 12 to 18 months of on-time payments.
After several months of using and paying off the card in full to build a credit history, consider getting a small personal loan from your local credit union and paying that off.
Also, consider signing up for a credit monitoring service that gives you access to your FICO scores. (Some credit monitoring services offer other types of credit scores, but you'll want to look at your FICOs, since those are the same scores the lenders will be using.) That way you can monitor your improvement over time.
Dear Liz: Your response to the couple whose credit card was closed by Citibank omitted one important point: Citibank (and any other credit card company) may not close an account without giving you advance notice of its intent to do so. Simply sending a notice (that, by the way, looks like junk mail) is – I would argue – illegal, precisely because it adversely affects consumer credit reports, which would show that the merchant closed the account.
I had to threaten Citibank with a class-action lawsuit to get it to reopen my existing account and ensure that no "derogatory" information was reported. To me, that's a bigger part of the story than simply suggesting the onus is on consumers to use credit cards at their peril.
Answer: You're wrong on a few points.
There's nothing illegal about an issuer closing a credit card account as long as it sends the customer notice at least 15 days in advance (which it did in the couple's case and, apparently, in yours). Issuers can change virtually any term, condition or rate with such notice, regardless of how it affects your credit.
Also, having an account closed by a credit card company is no more derogatory than closing it yourself, at least as far as your credit scores are concerned.
Pitching a fit, as you did, can sometimes get an issuer to reverse its decision to close an account. But it's typically done as a customer accommodation, not because the issuer broke any laws.
Dear Liz: I was intrigued by the idea of "restarting" my Social Security payments in order to get a larger monthly check, which you recently mentioned in a column. I understand that I would have to pay back all the benefits I've received so far, but would I receive credit for the taxes I paid on that income?
Answer: According to the Internal Revenue Service, you can claim either an itemized deduction for the taxes you paid or you can take a tax credit, whichever gives you the larger savings. You can find more about how to calculate your taxes in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, at www.irs.gov.
Kiplinger magazine has an article in its July issue, “
It's clearly not a solution for everyone. But if you started receiving benefits before full retirement age and have the cash on hand to pay Social Security back for those benefits, you can end up with a bigger monthly benefit.
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© 2008, No More Red Inc. Liz Pulliam Weston is author of “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life.” She regrets that she cannot respond personally to inquiries, but questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., #238, Studio City, CA 91604, or use the “Contact Liz” form at her website, www.lizweston.com.
