Know Your Score – Part X
A recent client was hoping to buy a new home. He and his wife were renting a manufactured home in a park and wanted a place of their own to raise the two children. They called me after their bank manager suggested they call me to help them with their credit and possibly find a lender that would fund a mortgage for them. Needless to say they were very reluctant when they called me.
The husband had been a long time lineman for a large telephone company. But unfortunately had been temporarily laid off about five years ago and was out of work for about 8 months. Due to this event and afterward getting behind in their obligations they were forced into bankruptcy. After 8 months he was rehired and uninterrupted employment since. His wife is a stay at home mom with occasional part time income. 4 years after their BK they were nevertheless on a cash only basis, with no credit re-established.
The solution for them was to re-establish credit and get their score as high as possible in the shortest amount of time. In this case we were in an escalating real estate market where literally every month the average price of a home was going up about $5,000 per month. So every month that went by only additional to the ultimate price of their new home.
The credit bureaus determine a credit score by considering only these five factors. 35% of a score is paying bill on time. 30% of the score is balances on revolving debt (credit cards, lines of credit) 15% of the score is credit history(length of time and account has been open) 10% of the score is credit mix (mortgage, auto and some revolving debt is their ideal) and 10% of score is inquiries (every time credit report is pulled is a negative) over the last six months.
Since they had virtually none of these factors in the last two years, only one bureau had a score (524) and the other two had N/A for a score.
To solve this problem he talked to his mother who had a VISA card that she had had for 8 years, no balance and always paid as agreed. She put him on this card as an empowered user. His objective was not to use the card. In fact he told her not to give him a card or already the account number. All he needed was the history. As soon as he was put on the VISA as an empowered user, his report showed all 8 years of great credit history. And he obtained a secured MasterCard with a $250 credit limit and a national dept store credit card with a $200 credit limit. All three of these reported to all three credit bureaus.
The consequence one month later is a 664 average score from all three credit reports.
Also observe here that your credit score is heavily weighted on the last two years. The bankruptcy 4 years ago was all but insignificant. The only thing it would factor into is whether a bank or lender guidelines had an issue with the bankruptcy, not the credit bureaus!
They were approved for a mortgage for a traditional built home with a yard for the kids. By the way their payments in this case were only a associate of hundred more than their rent for a manufactured home and after the tax deduction for interest and character taxes their net payment is a little less than their rent was! More about you and your credit coming in the next article.