Credit is a financial tool that enables you to buy things now without paying for them all at once. Your ability to use credit responsibly and repay creditors on time has a lot to do with how much access to credit you will have in the future. Building a solid credit history gives you more buying power when you need it, and that can be especially valuable when you are buying a home.
When you apply for a mortgage, the lender will evaluate your credit history to see how you have managed credit in the past, and then use that information to determine how likely you are to keep up with payments in the future. By predicting how well you will manage your debt, the mortgage company can measure the risk involved with lending you money.
Everything else being equal, someone who has consistently made payments on time is a lower credit risk than someone who has not. Because lenders usually offset risk with higher financing charges, having a better credit history generally means getting more favorable loan terms. And because some loan options are riskier than others, good credit may give you more flexibility in structuring your mortgage.
Many people believe that they can't buy a home unless they have great credit. While it's certainly helpful, a flawless credit history is not a requirement for buying a home. In fact, homeownership can be a tool for getting past credit difficulties.
Buying a home gives you an opportunity to improve your financial situation by:
Before lending you money, creditors - including mortgage lenders - need to determine how likely you are to pay it back. One way to do that is by examining your past use of credit, which is recorded on your credit report.
Although each credit reporting agency may report information differently, all credit reports contain the following:
Credit scoring translates the information on your credit report into a numeric score, which makes it easier for a lender to evaluate your credit. Scores generally range from 300 to 900, with a higher score indicating a greater likelihood that you will make payments on time.
Credit scores are developed by comparing credit reports from millions of consumers over time, and identifying factors that tend to predict how well people manage credit later on. Those factors include:
Credit scores are considered unbiased because they are based only on your past credit history. Your score cannot be based on race, religion, national origin, age, sex, marital status, or income.
Whether you need to rebuild a damaged credit history or simply maintain your solid rating, here are some things you can do to achieve your goal.
Your first step is to make sure that your credit report is accurate. Balancing out a negative entry with consistent payments takes time and effort - getting rid of an incorrect entry is much easier, and can make a big difference in your credit score. Here's how to check for and correct errors:
Having credit cards and loans that you pay regularly is a good thing in the eyes of lenders. At the same time, having credit available often brings the temptation to buy things you can't really afford. The key to good credit management is in finding a comfortable middle ground.
To guard against overspending, try to think of credit as a tool that gives you more financial freedom - not more stuff.
If you are overextended with credit and living month-to-month, debt consolidation might make your payments more manageable. By paying off multiple credit accounts using a refinance or home equity loan, you can take advantage of three valuable benefits: