Secure Your Way into Having a Credit History

I recently met up with a friend of mine who started looking into buying a house, but has no credit history. ‘None at all?’ I asked? She moved to the US only a few years ago, so she never had the benefit of building her credit history as an authorized user for her parent’s credit cards. She doesn’t have US student loans, her utility bills are included in her rent, and her company pays her cell phone bill. She bought a used car and paid for it in cash.

Although it seems like a catch-22, where you need to have a credit history in order to get credit, there may be a few ways out. The most reliable one, which I suggested to her, is getting a secured credit card. Several banks and credit unions offer secured credit cards, which require customers to deposit a certain amount of money as collateral. This deposit, as long as it stays in the bank, generally becomes the credit card holder’s line of credit. Basically, this is a credit card that requires you give the maximum amount you’d like to be able to charge on it – your line of credit – up front. This way, you build your credit history by using it as any other credit card, receiving a statement and paying your balance every month, while the bank has access to your deposit in case you default on it.

Secured Credit Card (from Capital One)

If you decide to close your secured card, say, because you “graduated” into receiving offers and getting approved for an unsecured credit card, you get back the deposit you made for your credit line. There may be some fees, however, for maintaining a secured credit card that end up biting into your deposit, so it’s worth shopping around before settling on the right one.

Below is a sample of a few secured credit card offers out there, with a wide range of minimum deposits and fees.

  • BankAmericard Secured Credit Card ­­– the credit line for this secured credit card offered by Bank of America varies from $300 to $4,900 and is determined by the Bank according to your income and the minimum deposit you would like to make. Your deposit does not earn any interest (it is placed into a ‘Deposit Account’), but after 12 months you may be eligible to “graduate” into an unsecured card and get your deposit back. Annual fee: $39
  • USAA Secured Credit Card– the deposit you make for this card, which can be between $250 and $5,000, is placed in a 2-year Variable Rate CD. On one hand, this means your deposit is locked in for two years, but on the other, at a current annual yield of 0.74%, it has one of the highest CD returns out there. This secured card is available as an American Express and a MasterCard. Annual fee: $35
  • US Bank Secured Visa – you can make a deposit from $300 to $5,000 into a US Bank Savings account, which currently yields 0.05% per year. Your line of credit is written out for the same amount as your deposit, and US Bank reconsiders cardholders for an unsecured credit card after 12 months of good standing. Annual fee: $35
  • Wells Fargo Secured Visa – users can deposit $300-$10,000 for this card, all of which becomes the card’s line of credit. This deposit, however, does not earn any interest (it is placed into a ‘Collateral Account’) so if your goal is to establish credit it is probably best to deposit close to $300 and pay the balance off in full every month. You can deposit any extra money into a savings account or a product that yields at least some interest. Annual fee:$25
  • Capital One Secured MasterCard – this is technically a hybrid between a secured and unsecured credit card. The minimum security deposit ranges from $49 to $200, but the starting credit line starts at $200. So, if you are deemed fairly safe, you may be required to only make a $49 deposit for a $200 credit line. This is a great advantage, as it doesn’t force you to lock in as much money in collateral. Any additional deposit you make over your required minimum translates into a higher credit line, up to $3000. Annual fee: $29

In deciding how much to put down as a deposit, consider your reason for getting a secured credit card. If you plan on only using your card for a few small charges each month, you may as well make a deposit close to the minimum requirement rather than lock in more of your funds into low- or no-yield accounts. On the other hand, if you see this as a step into embracing a credit card-filled life, it may be worth making a larger deposit so that you can get used to statements and paying off balances that more accurately reflect those you expect to face once you have better access to credit. But whichever you choose, don’t forget to pay off your balance in full so that you don’t erase the benefits of having a secured credit card with the ding of a default on your credit history.

And once you’ve proven your creditworthiness with your secured card for a year or so, start looking for unsecured credit cards. Yes, you too can eventually have one of those cards that doesn’t require locking in money upfront and earns rewards!

Cash for a Clunker Appliance

Similar to last year’s cash for clunker program, the American Recovery and Reinvestment Act of 2009 has allocated $300 million for rebates to eligible residential consumers when they recycle their used appliances and purchase new energy-efficient ones (otherwise known as ENERGY STAR appliances).  Each state is in charge of designing  and implementing its own unique Appliance Rebate Program, and the Department of Energy (DOE) has already approved all of them.  A handful of states (Iowa, Kansas, Minnesota, Rhode Island) have started their programs, but most will launch theirs later this month.  Click here for details of the program available in your state. Continue reading

Insurance is Not Just for You and Your Car

Most of us at are probably renters.  We might be testing out different career paths or deciding which graduate school to attend, but the bottom line is that most of us have neither the funds nor the commitment to purchase a home and stay in one place indefinitely.  Instead, we hold a premium on being mobile.  But nearly two-thirds of renters do not have renters insurance and many landlords do not require this.  Here are three BIG reasons why renters need insurance: Continue reading

Homebuyer’s Credit: It Might be Better to Wait

If you are rushing to purchase a home and sign a binding contract before May 1, 2010 in order to get the homebuyer’s credit (a maximum $8,000 for first-time buyers or $6,500 for repeat buyers) and secure a low mortgage rate, it might be better to wait especially if you are still unsure.  According to Jack Hough at SmartMoney, once these incentives disappear, interest rates will increase 0.75% but home prices might drop as much as 5%.
Continue reading

More Purchases are Now Eligible for the Home Buyer Tax Credit

The federal home buyer tax credit was extended and expanded last week, giving home buyers more time and making more people eligible for the credit.  The Worker, Homeownership, and Business Assistance Act of 2009 extends the home purchase deadline to April 30, 2010, raises income limits for eligibility, and allows some existing home owners to take advantage of the credit as well.

For first-time home buyers, the tax credit is calculated as 10% of the home’s purchase price, up to $8,000.  You are considered a first-time home buyer if you (and your spouse) have not owned a house in the last 3 years.  If you already own a home, however, you may be eligible for the credit as an existing home owner.  To qualify under this category, you (and your spouse) must have owned a home and lived in it for at least five consecutive years out of the eight years prior to making this new home purchase.  The credit for existing home owners is also equivalent to 10% of the purchase price, but is capped at $6,500.  For both groups, the home’s purchase price cannot exceed $800,000.

The income limits have also been increased under this new Act, and, for first-time home buyers, apply retroactively up to the beginning of 2009.  That is, the first-time home buyer tax credit applies to purchases made between January 1, 2009 and April 30, 2010, inclusive, although the credit for existing home owners only covers purchases made on or after November 6, 2009, up to April 30, 2010.  The retroactivity on the first-time home buyer credit may now make some people, who bought homes earlier this year but were ineligible then for the tax credit, eligible through the income limit increase.  With the WHBA Act, the tax credit is available to individual taxpayers with a modified adjusted gross income (MAGI) of up to $125,000 (or $225,000 if married filing jointly).  Individuals with MAGIs between $125,000 and $145,000 (and joint filers with MAGIs between $225,000 and $245,000) may claim partial credit.

If you are thinking of taking advantage of this home buyer tax credit, here are a few more things you should know:

–  You must live in your new home for 36 months after the purchase date.  If you fail to do so, you are required to pay back the credit when you file your income taxes for the year in which you move out.  (Deployed military personnel are excluded from this restriction, as long as they do not sell their new home.)

–  If you are claiming the credit as an existing home buyer, you do not need to sell your old home as long as you make your new home your primary residence.

–  If you cannot meet the April 30, 2010 deadline, you have at least then to enter into a binding sales contract and you must make the purchase by June 30, 2010 to be eligible for the credit.

–  The tax credit is also available for constructing a home in a lot that you already own, and the April 30, 2010 deadline applies to the date of occupancy.

–  For a purchase in 2009, you can choose whether to claim your credit by amending your 2008 taxes (use IRS Form 1040X to do so) or through your 2009 taxes.  Similarly, if purchasing in 2010, you can include the home purchase in either your 2009 or 2010 income taxes.  This flexibility may be useful if your MAGI is below the limit in one year but not the other, and you may decide according to which gives you the highest credit.

Legislators expect that, with the expansion of the eligibility criteria for this tax credit, home sales will pick up again.  If they are at all right, this increase in demand may bring increases in housing prices.  So if you are thinking of buying a home in the next year, jumping in early might get you a better deal – and a hefty tax credit to go with it.

DC Offers Assistance to Homebuyers, Too

As state governments try to bolster their housing market, new credit incentives and housing assistance programs are emerging left and right.  These go along with the federal first-time homebuyer’s tax credit, and usually give priority to state residents.  This past weekend Bob Tedeschi wrote in the NY Times about the new program offered by the state of New York, through which the first 20% of the mortgage interest paid each year for a new home can be applied as a credit in state income taxes, while the remaining 80% can still be deducted from federal income taxes.  There are household income limits for eligibility.

Washington, DC has had a Housing Purchase Assistance Program (HPAP) for several years now, providing financial assistance to first time homebuyers upfront rather than only upon filing 2009 income taxes next year or amending 2008 returns, though the process may be as cumbersome as the tax-related ones.  The DC HPAP provides interest-free or low-interest loans (the mix between the two is determined by the loan amount and the applicant’s income level) to help first time homebuyers in the District with down payment and closing costs.  Priority is given to low-income, elderly, handicapped, disabled, or displaced residents, but other District residents (having lived in DC for one year prior) are also eligible for the assistance.  Applicants must be household heads who have not owned real estate in the last 3 years, have a good credit rating, and are purchasing a home within the District.  Non-residents who have been employed in DC throughout the previous 12 months or who have lived in the District for any 3 years as an adult may also apply.

The amount disbursed under the HPAP depends on the applicant’s income and household size as well as on the size of the mortgage and total funds available for the program, but is capped at $70,000 for down payment and the lesser of 4% of the purchase price and $7,000 for closing costs.  Support declines with income, but applicants are only required to match by 50% any disbursement over $3,000 and $500 for disbursements below that amount.  An individual who earns $45,500, for example, is eligible for a maximum assistance of $53,700 and a family of 4 with a household income of $80,750 can receive up to $22,850 (click here for the full matrix of household incomes and maximum assistance values).  Individuals with incomes of up to $58,800 (higher for larger households, up to $89,250 for a 6-person household) are eligible for the down payment assistance, and closing cost assistance is available to individuals with incomes of less than $72,801 (again, higher for larger households, up to $110,450 for an 8-person household).

Under the DC HPAP, no repayments are required over the first five years of the loan, and, after that, borrowers have 40 years for repayment, unless the borrower transfers or refinances the property or it is no longer his/her primary place of residence, in which case to whole loan amount is due immediately. The DC Department of Housing and Community Development accepts applications for the program through partner community-based organizations.