Editorial Policy

Best way to use windfall to boost credit

Erica Sandberg

July 30, 2015

QHi Erica,

My mum has offered to get another credit card for me because I'm in the market for a condo and my credit score is too low. It is low because my card's balance is too high? Is it true that her opening an account will help me? She offered to either give me $20,000 for my down payment (I already have enough from my granddad when he passed) or I can use it to pay my credit card, on which I owe a lot. What is the best thing to do? We are both wondering. Thank you. — Georgina

ADear Georgina,

The magnanimity of some parents is truly astounding! Even if your mother easily has the ability togift such a sum, let's face it — it's substantial. Aside from that, she's also willing to put her credit rating on the line for you; another grand gesture.

Like most prospective homebuyers, it sounds as if you'll be borrowing money to pay for most of the condo's cost. Because of that, you'll need to prove to the lender that you are a responsible person with sufficient means to repay. And yes, an important aspect is having a good credit rating, as it will help you qualify for a low interest rate loan.Ask Erica

The way you've been using credit up until this point has been recorded on your consumer credit reports since you opened the accounts. Lenders depend on the scores that are generated from the information on those reports, with the FICO score being most common. This risk score ranges from a low of 300 to a high of 850, and anything above 750 is considered excellent. To achieve a great score, you must have a long history of borrowing, but always paying on time and keeping debt in check. The less you owe relative to the amount you can borrow the better.

Because your credit card balance is too high, your scores are negatively impacted. To raise them, you can delete the balances or increase the debt-to-credit-limit spread (called credit utilization), or you can do both. Therefore, your mother's offer will help tremendously.

Since you say your granddad left you with enough money for the condo's down payment, use the money your moth is willing to part with to pay the credit card debt down. That should go a long way toward FICO score rehabilitation. If it's not enough to hike those scores to the mid-700s, you can accept her offer to go in on a new account with you, as it will add more borrowing power to the mix.

For example, let's say you owe $30,000, which is the same amount as your card's credit limit. In that case, you have totally maxed out your credit line, which really damages your credit score. Send the financial gift to your creditors and the debt drops to $10,000, opening up $20,000 on your credit line. That brings your credit utilization down to a little more than 33 percent. Then with the new account, you'll have another credit line, expanding your credit utilization even further. A far better score is then achieved. Huzzah!

Of course, a hearty down payment is important to a lender, but if you already have the standard 20 percent of the purchase price, great. You'll also be asked to provide documentation about your income, assets and liabilities. If it appears that you have enough steady cash flowing to meet the monthly mortgage, insurance and taxes, as well as all expenses plus some for savings, you should be in a positive position.

My only concern is the root of your debt. Are you truly financially stable? If you've been supplementing your lifestyle with plastic, you're not, and that needs stop immediately. Your mother's credit rating will be impaired if you overcharge with the co-owned card and then hold onto debt, because that account will show up on both of your credit reports. Treat it — and all of your financial obligations — respectfully.

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