Real Estate Matters: How to establish credit before purchasing your first car or home
Q: I’m in the process of buying my first car (researching, calculating finances) and I wanted to ask what your advice would be as I currently have no credit history. After I buy a car, I’m going to start looking for a home.
How do I best establish my credit? Alternatively, are there other options available to me so I can purchase a car or home outright or take out a loan without having a credit history?
I would greatly appreciate any advice.
A: It feels great to achieve a financial goal, whether that’s buying a car, leasing an apartment or buying a home.
But here’s what you have to know: If you opt to finance or lease your vehicle, those debt payments may reduce the amount of money you can borrow for a home purchase. And, if you buy or lease an expensive car, that could reduce the cash you have available for your future down payment.
On the other hand, if you buy a home first and a car later, you’ll still be able to buy a really nice car because auto lenders have different loan requirements than mortgage lenders.
So, if you’re set on buying or leasing the car before the home, you’ll need to factor what your monthly cost will be for this car into your long-term home buying equation. Let’s say you decide to lease or finance a $40,000 car. That lease or finance arrangement may last five or more years. During that time, your monthly payment will likely reduce the amount you can borrow for a new home.
While we’re not telling you to avoid an expensive car, and we encourage you to make sure the car you get meets your needs, you may want to choose a less expensive option or model so that you can achieve your home buying goal sooner.
Now let’s address the issue of your credit history, or complete lack thereof. In 2016, the Consumer Finance Protection Bureau (CFPB) published a report that indicated “26 million Americans are ‘credit invisible,’” meaning that about one in every 10 adults either has what’s known as a “thin” file or no credit file with one of the three nationwide credit reporting companies. According to the report, “Black consumers, Hispanic consumers, and consumers in low-income neighborhoods are more likely to have no credit history or not enough current credit history to produce a credit score.”
So, it’s possible you don’t have a credit report. You should visit annualcreditreport.com and try to download your credit reports from each of the three major credit reporting bureaus: Experian, Equifax and TransUnion. Through April 2021, each of the credit reporting bureaus are offering a free weekly credit report. You can also sign up for a free account at Equifax.com, Experian.com and Transunion.com, which will give you access to their educational credit scores, the Vantage Score or your FICO credit score, in addition to your credit reports, which will be helpful indicators that your credit history is starting to form.