Don't Borrow For The Opportunity To Borrow Later

Randy and his wife have limited credit histories, so they aren't sure how they'll be able to get a mortgage when they're ready to buy a house. Dave explains how this works.

QUESTION: Randy in Pensacola got married a few weeks ago, and they’re working the Baby Steps. They’re living in a rental property and plan to move in a few years. They have limited credit histories, so they aren’t sure how they’ll be able to get a mortgage when they’re ready to buy a house. Dave explains how this works.

ANSWER: When you get everything paid off and there are no open accounts—I’m not talking about zero balances, I’m talking about the account is closed—about six months later, your credit score will be nonexistent, and then you’ll qualify for a mortgage. You need to have no credit score or a really good one, but you can’t have a medium score.

You’ve got to pay off your bad debt. It’ll stay on your credit report, but it shows a bad debt that you’ve made good. Your credit score itself will still disappear because that’s just some old, bad credit that you paid. If you have no active involvement with debt of any kind, within about six months, it goes to zero. That’s really what you want.

You do not want to go around borrowing money so that later you have the opportunity to borrow money. It’s an absurd set of logic. You do not want to spend your life borrowing money so that later you have the opportunity to borrow money. It is not wise. Avoid getting caught up in that, and go ahead and spread the word with your friends.

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