Mortgage Resources

Featured Tools

Loan Info

Company Info

Other Services

BLOG

Don's blog

Why credit is important

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.

How credit affects your loan options

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.

Improving your credit

Get copies of your credit report —then make sure the information is correct.

Go to www.annualcreditreport.com. This is the only authorized online source for a free credit report. Under federal law, you can get a free report from each of the three national credit reporting companies every 12 months.

You can also call 877-322-8228 or complete the Annual Credit Report Request Form at www.ftc.gov/bcp/edu/resources/forms/requestformfinal.pdf and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Pay your bills on time.

One of the most important things you can do to improve your credit score is pay your bills by the due date. You can set up automatic payments from your bank account to help you pay on time, but be sure you have enough money in your account to avoid overdraft fees.

Your credit score is usually based on the answers to these questions:

Do you pay your bills on time? The answer to this question is very important. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.

What is your outstanding debt? Many scoring models compare the amount of debt you have and your credit limits. If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score.

How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.

Have you applied for new credit recently? If you have applied for too many new accounts recently, that may negatively affect your score. However, if you request a copy of your own credit report, or creditors are monitoring your account or looking at credit reports to make prescreened credit offers, these inquiries about your credit history are not counted as applications for credit.

How many and what types of credit accounts do you have? Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score. However, too many finance company accounts or credit cards might hurt your score.

Learn the legal steps you must take to improve your credit report.

The Federal Trade Commission’s “Building a Better Credit Report” (http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre03.shtm) has information on correcting errors in your report, tips on dealing with debt and avoiding scams—and more. The link above also contains a sample dispute letter and instructions on submitting the correction request.

Establishing Credit

When you don’t have a credit history, it can be difficult and frustrating when trying to obtain a credit card or other type of loan. Establishing your initial credit history can be a Catch-22. If you don’t have credit, not many places are willing to give you credit, yet how can you ever establish credit if nobody is willing to give you any?

Generally, credit is established by getting a credit card, store card or gas card initially and maintaining a good payment history. You don't want to use these cards like free money though. Most of these lines of credit have high interest rates and penalties for going over the limit. It is a good idea to get a card and use it and pay it off every month. The cards report every month to the credit bureaus and this establishes a payment history.

If you are unable to get a credit card, you can get a secured card. Some secure cards report to credit bureaus the same way credit cards do and this will help establish a credit history and credit rating. A secured card is like a credit card except to you put the money up before using the card so you are not buying on credit. It works like a debit card from your checking account.

Credit Resources