How to create a quick credit history for lenders

She has a down payment for a home, but no bank will lend to her

By Sally Herigstad

To Her Credit

Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
I have saved up $5,000 so I can put 10 percent down on a $50,000 house -- cheap, I know.

I have lived at my residence for over three years. I have had my current job for one year, and I had the job before that for three years. I have an established bank account, and still every lender I have spoken to says I cannot be approved for anything! I followed the link to the FHA loan page and it directed me through a search back to one of the lenders that said I cannot be approved.

What am I missing? Or do they just not want to try to help me?   -- Sheree

Dear Sheree,
I can understand your frustration. You think you're doing everything right, but it just doesn't seem like enough.

It sounds as if the problem you are experiencing is from having a "thin" credit file. A thin credit file means that you haven't shown a sufficient history of borrowing and paying back different types of  loans (such as a car loan and credit cards, for example). Lenders look to your past experience borrowing money and paying it back on time as agreed to determine your creditworthiness. Without evidence of being a good borrower, lenders are hesitant to provide you with a loan. These days, even with FHA backing, lenders expect to see a credit history before they give you a home mortgage. Greg Cook, First-Time Home Buyer Specialist in Temecula, Calif., says, "Back in the good ol' days, the FHA felt that 'no credit was good credit,' but even FHA loans now require a credit history and credit scores."

Fortunately, you can take steps to build a credit history that lenders will take a second look at, and there's no need for the process to take years. Consider these options:

Ask a friend or family member with great credit to add you to one of their credit cards. "If she has a willing relative, she can be added as an authorized user to an existing credit card," says Cook. "It should be a card that has a perfect payment history, a low balance owed and has been open for a couple of years at least." The owner of the card can call the credit card company and ask to have you added. Within 30 days or so after you are added, the credit card should show on your credit report as if it were your own.

Have other forms of payment history reported to the credit bureaus. Everyone pays bills, even if they don't have credit cards. You can try to get credit for paying your bills on time. The FHA still allows the use of alternate or nontraditional credit reports. Ask your landlord, cellphone provider, insurance company, utilities, and so on to report your payment history to the credit bureaus. They may or may not comply with your request, but it doesn't hurt to ask. Be aware that not all lenders accept these forms of credit, even though the FHA does.

Open one or more secured credit cards. "Because she already has $5,000, that should be simple," says Cook. Secured credit cards typically require a deposit as collateral for using the card. "Use the card each month, but pay off the balance monthly to keep the balance owed below 30 percent of available credit." Shop around before you choose a card. The fees and interest rates vary significantly.

Ideally, your credit history should show at least three lines of credit, according to Cook. You can use a combination of these tactics to make it work.

A common misconception is that if you meet all the qualifications as set forth by the FHA, someone will give you a loan. The FHA standards are minimum for an FHA loan, but the bank also has its own standards. You have to pass muster with both the FHA and a lender to get into a house.

Don't take it personally that you haven't gotten a positive response from lenders yet. Five years ago, you probably would have been a shoo-in with your down payment and your lack of debt. Since the housing crisis, however, everything's changed. That doesn't mean you can't get a home -- it only means you need to take a few more steps. With verifiable credit, you should be in good shape to buy a house within months.

Take care of your credit, and you should be in a home of your own soon!

See related: Bulk up your thin credit in 4 easy steps

Gary Foreman, "New Frugal You"

Sally Herigstad, "To Her Credit"

Cathleen McCarthy, "Cashing In"

Jane McNamara, "Let's Talk Credit"

Elaine Pofeldt, "Your Business Credit"

Erica Sandberg, "Opening Credits"

Published: January 18, 2013

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