YOUR CREDIT HISTORY: WHY IS IT IMPORTANT?

When lenders evaluate whether or not they can give you a loan, your credit rating can be just as important as your gross income. Why? Because your credit rating essentially tells lenders your ability to pay bills timely and in full. Your credit history can contain a record of your past bill payments, including everything from car loans and credit cards to cable television and telephone bills. If your credit rating is strong, lenders will be more confident and able to provide you with a bigger mortgage and better interest rates. If your credit rating is poor, however, it doesn’t mean that you can’t qualify for a loan. Rather, it just communicates to the lender that the borrower is a higher risk investment and that the probability of default has increased. When buyers have poor credit, lenders may be a little hesitant to provide a mortgage and may demand a higher interest. The higher interest rate compensates them for the higher risk they are taking on the loan.

QUICK NOTES Before seeking home financing, you should have some idea of your credit score. Your credit rating tells potential lenders your ability to pay bills. The stronger your credit rating, the more confident lenders will be to approve your loan. Check your credit using the three major credit bureaus: Equifax, Experian and Trans Union. If you don’t have credit, establish credit. Building good credit requires on-time payments over a period of time. If you have bad credit, consider trying to repair. A history of bad credit will not necessarily prevent you from getting a home loan.

By law, you cannot be denied a loan on the basis of your gender, race, national origin, religion, marital status, age, or dependence on income from public assistance. The most common reasons for denial of credit or a loan include:

• Errors on a credit report
• Very strict lender standards
• Significant outstanding current debt
• Cosigners without good credit
• Requesting a loan for non-standard purposes

If you are denied a loan, the lender must provide you with the reason for the denial or instructions on how to request the reason. You also must receive a written statement of the denial and your accompanying rights.

Checking Your Credit

Credit scores are based on information collected about consumer credit and payment histories. The three major credit bureaus are:

• Equifax
• Experian
• Trans Union

Lenders can obtain your credit score from these bureaus with your social security number and express permission.

Individuals can also obtain their credit scores by contacting the bureaus and requesting a credit report. It is important to receive and understand your credit report prior to applying for mortgages. This way, you will have an idea of your credit worthiness before meeting with a lender and you will be prepared for questions that might be posed to you.

Establishing Your Credit

In today’s economy, good credit is extremely valuable. It enables you to get loans to make major purchases, such as homes, cars, and a college or post-graduate education.

Lenders look at specific factors when evaluating your credit. These include your income and expenses (rent, utilities, and other regular expenses), assets (valuable items that can be used as collateral for a loan), and credit history (how much debt you have accumulated and how timely you have been with payments). For those who have just begun working and for those who have had a history of bad credit, many opportunities exist to establish and improve your creditworthiness.

First, you can open savings and checking accounts in your name. Deposits, withdrawals, and transfers made over time can demonstrate your capacity to handle money responsibly.

Another method to establish credit involves obtaining and diligently repaying a loan. You can obtain a loan for a car, for example, and have a friend or relative cosign for the loan. Their good credit history will help you get the loan because as a cosigner they distribute the risk for the lender. Although loans can be an effective method to establish credit, they also carry risk and are expensive due to the accompanying interest expenses.

Credit cards also establish your credit worthiness. If you have trouble obtaining major credit cards like a Visa or American Express, you can apply for gasoline and department store credit cards instead. Consistent, on-time payment of credit card bills will help improve your credit score. But, remember to be aware of the details of your credit card terms. You should know the grace period before finance charges apply, annual percentage rates, annual fees, and other items that could result in extra expenses for you.

More than anything else, building good credit requires consistent payments over long periods of time. If you are diligent in how you handle your expenses, and if you demonstrate patience, you can establish a good credit history that will ultimately lead to better mortgage terms for you.

Repairing Bad Credit

Although it can be stressful, repairing bad credit is definitely possible. Here are some tips that you can consider while trying to repair bad credit.

• Pay extra attention to how you spend money
• Create a weekly and monthly budget to monitor and minimize your expenses
• Don’t forget or ignore your bills
• Ask your creditors to set up a new payment schedule that you can follow
• Stop using credit cards to make your purchases
• Work with a credit counseling organization
• Consolidate your debt so that you’re making one payment instead of several
• Look for a debt consolidation strategy that has a lower interest rate than your current debts

Bottom line: Get organized, but don’t get discouraged.

A history of bad credit will not necessarily prevent you from obtaining a home loan and buying your first house. Even if you have been turned down for other loans, such as a car loan, you can qualify for a home loan. With home loans, lenders use the property as collateral for your mortgage; thus, they can have more risk flexibility than with car and other loans.

If you’re organized intelligently and safely establish new credit or repair old bad credit, you can qualify for a loan to purchase the home of your dreams.