Build Your Case - establishing good credit before buying a home - Brief Article

Kiplinger's Personal Finance Magazine, Oct, 2000 by Kimberly Lankford

My husband and I want to buy our first home two years from now. We plan to pay off our student and car loans, then start saving for a down payment. However, we were told that to qualify for a mortgage we need four open credit accounts. Is that true?

--AMY STULL, Cross Plains, Wis.

First, congratulations on your foresight. Taking two years to establish a strong credit record will not only help you qualify for a loan, it may also get you a lower rate.

You don't need four accounts, but creditors do like to see that you've managed credit well. Your record with your car and student loans will help. But you'll look even better if you also have experience with revolving credit--which lets you decide how much or how little to pay each month. If you don't already have a credit card, get one now, charge some items, and pay off the balance each month so you don't owe any interest.

You're wise to pay off your car and student loans first. Lenders look carefully at your debt-to-income ratio when figuring out how large a mortgage you can afford. To calculate your ratio, add up all your monthly obligations, then divide the sum by your monthly income. Your debt should eat up no more than 20% of your pretax income, and no more than 40% when you add in the mortgage, says Maxine Sweet, a vice-president of the credit-report company Experian. The less you owe in student and car loans, the more you have to cover the mortgage.

The most important thing you can do right now, says Sweet, is pay your bills on time. Don't apply for a lot of other credit before you attempt to get your mortgage, either. If you've given numerous lenders permission to review your credit report, it may look as if you're on a credit binge. (Comparison mortgage shopping within 30 days, though, doesn't hurt your score. See "Don't Overdo It," Aug.)

Finally, the more you save for a down payment, the better. Lenders are usually more flexible when you're putting a big chunk of money down yourself.

RELATED ARTICLE: Credit cards

With just the right card, everyday purchases can rack up frequent-flier miles good for free flights.

Airline credit cards are fine if you routinely fly the same carrier. But if you use different airlines, you're better off with a card that lets you accumulate points that can be exchanged for tickets on any airline.

Those on our "best" list, at right--selected for their flexibility and low annual fees--require 25,000 points for a free ticket to anywhere in the contiguous U.S. If you travel within a specific geographic area, consider the Elan Platinum Travel Card (800-320-2282) and Capital One MilesOne card (800-955-7070), which award free tickets within a region for only 18,000 points. And First Union's AirMiles Plus card (800-359-3862) can pay off for big spenders who don't mind a $75 annual fee. It grants 1.2 points (instead of the standard 1 point) for each dollar you spend.

--JOAN GOLDWASSER

Low-interest premium cards
Best if you carry a balance

                                     RECENT    CASH-ADVANCE
ISSUER                               RATE(*)    RATE/FEE(C)

Pulaski Bank & Trust (G)              8.75%      8.75%/none
Simmons First National (P)            9.95        9.95/none
USAA Savings (G, P)                  10.5         10.5/none

No-fee premium cards
Best if you usually pay the balance each month

                                     RECENT    CASH-ADVANCE
ISSUER                               RATE(*)    RATE/FEE(C)

Capital One (G, P)                     9.9%      19.8%/2.5%
Wachovia (G)                          10.9          19.99/4
AFBA Industrial (P)                   11.5           15.9/2

Rebate cards
Best of the air-miles cards

                                     RECENT    CASH-ADVANCE
ISSUER                               RATE(*)    RATE/FEE(C)

Visa MilesOne (P)([dagger])           9.96%      19.8%/2.5%
Chase Flight Rewards (P)([dagger])    16.99         21.05/3
Travel Choices Visa                   18.49         18.49/3

Low-interest premium cards
Best if you carry a balance

                                      ANNUAL        LATE/
ISSUER                                   FEE   OVER LIMIT

Pulaski Bank & Trust (G)                 $50      $20/$20
Simmons First National (P)                50        29/20
USAA Savings (G, P)                       45      20/none

No-fee premium cards
Best if you usually pay the balance each month

                                       GRACE        LATE/
ISSUER                                PERIOD   OVER LIMIT

Capital One (G, P)                   25 days      $29/$29
Wachovia (G)                         20 days        29/29
AFBA Industrial (P)                  25 days      15/none

Rebate cards
Best of the air-miles cards

                                                  MILES
                                      ANNUAL     NEEDED
ISSUER                                   FEE   FOR TICKET

Visa MilesOne (P)([dagger])              $19       25,000
Chase Flight Rewards (P)([dagger])        25       25,000
Travel Choices Visa                       25       25,000

Low-interest premium cards
Best if you carry a balance

                                      TELEPHONE
ISSUER                                  NUMBER

Pulaski Bank & Trust (G)             800-980-2265
Simmons First National (P)           800-636-5151
USAA Savings (G, P)                  800-922-9092

No-fee premium cards
Best if you usually pay the balance each month

                                      TELEPHONE
ISSUER                                  NUMBER

Capital One (G, P)                   800-822-3397
Wachovia (G)                         800-842-3262
AFBA Industrial (P)                  800-776-2265

Rebate cards
Best of the air-miles cards

                                      TELEPHONE
ISSUER                                  NUMBER

Visa MilesOne (P)([dagger])          800-548-4593
Chase Flight Rewards (P)([dagger])   800-441-7681
Travel Choices Visa                  800-349-2632