Q: I have no credit history and cannot figure out a way to establish any and therefore have a good credit/FICO score. I don't have any debt, and I listen to Dave Ramsey and Suze Orman for financial advice. Dave doesn't think your FICO score is important, but I think not having a good FICO would make buying a home very difficult. Do you agree, and if so, would getting a prepaid debit card like the one Suze Orman is offering be helpful?
A: It's good that you listen to financial shows, but you may want to add Clark Howard to your list of financial planning gurus. It is very difficult to obtain a mortgage without a good credit score let alone without any.
According to Dave Ramsey's website, you can get a mortgage if you have 20 percent for a down payment, choose a 15-year conventional loan, have a strong employment history with a good income, demonstrate 18 to 24 months of paying recurring expenses and can find a lender willing to use manual underwriting. That sounds great in theory, but not everyone can come up with a 20 percent down payment, afford payments on a 15-year loan and have a strong employment history when they want to buy their first home.
Ramsey offers a lot of good advice about getting and staying out of debt, but I disagree with him concerning FICO scores. A good score can make a big difference when seeking a high-quality low interest rate for your loan.
Suze Orman is in hot water with her new prepaid debit card. Even though it is not a bad prepaid debit card, it is still a prepaid debit card with fees such as a $3 monthly fee, a $2 fee every time you talk with a customer service agent more than once a month and a $2 over-the-counter withdrawal fee. With prepaid cards, you spend your own money that you load on your card, so why not just use a debit card and avoid the extra fees? The prepaid cards don't help you build credit, because your payments are not reported to the credit bureaus, and they don't provide the fraud protection you get with a credit card.
Try getting credit established with small retail stores. Open an account, charge a small amount and make sure you keep the balance low and pay it off as soon as possible.
A secured credit card is a good option for those with no credit history. Secured credit cards are secured by a deposit account you own such as a savings account. Most banks offer these cards, and you need to make sure that the card you choose will be reporting your payments to at least one of the major credit bureaus so you can build up your credit score.
Be aware of high interest rates and other fees. Compare cards and select the one with the lowest fees that reports to the bureaus but doesn't report that you are using a secured card. Use the card and make payments on time, every time. Credit scores are based on the current total balance of your credit card divided by the current total credit limit. This will provide the debt ratio. The best scores are given when you use 20 percent or less of the credit limit available. Websites bank rate.com and credit.com have lists of secured credit cards.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.