If you are planning to buy a house, you have to know your credit. A better credit can mean opportunities for mortgages with lower interest rates.
Your credit report
Your credit report is a record of the money you borrowed, your payment history and how much credit is available for you. It usually consists of:
- A list of debts and a history of how you paid, including credit cards, car loans and student loans.
- Any bill referred to a collection agency, such as utilities or medical bills not paid or paid late.
- Public record information, such as tax liens and bankruptcies.
- Consultations about your solvency, indicating how many queries were made on your credit and if you were granted a loan based on the query.
Your credit score
Your credit score is a single number that helps lenders decide the likelihood that you pay your debts and plays an important role when acquiring a mortgage. The score ranges from 300 to 850 and is based on:
- Your payment history and ability to pay its debts on time. Late payments will decrease your credit score.
- The total amount of debt you have, including credit cards, student loans and car loans. If your credit cards are at the limit, this can reduce your credit score, even if the amount owed is not large.
- The time you have used your credit for and how it was handled. If you show a pattern of appropriately managing your credit, keeping balances low on credit cards and paying your bills on time, your credit score will be affected positively.
- The frequency with which you apply for new credit and new debt assumed. If you have applied for several credit cards at the same time, your credit score may drop.
- The types of credit you are currently using, including credit cards, retail accounts, installment loans, finance company accounts and mortgages.
A general guide to interpreting your score:
- Credit scores ranging from 770 to 850 are considered very good, and the best credit rates are usually available to borrowers within these scores.
- Credit scores above 700 are considered good, and most borrowers’ credit scores are at this level. The average credit score is 725.
- Credit scores below 650 may have difficulties obtaining a loan, and have higher interest rates and / or higher down payments.
You are entitled by law to receive a free copy of your credit report:
- Every 12 months
- Whenever you find a mistake and want to verify that it was repaired
- If you have been denied credit, and in certain other situations, such as in cases of fraud
Useful Tips for a good credit score
To help you build, maintain and protect your credit:
- Establish your credit if you do not have one. Open a low cost checking or savings account and ask one or two credit cards but use them carefully. It is important for providers to verify that you have a credit history to determine your ability to pay debts.
- Limit the number of credit cards and try to pay the balance in full each month. Using your credit cards responsibly can help you build an excellent credit.
- Fulfill your promise to pay the debts. With good credit, you can apply for loans for other items, like housing, car, or education at a lower interest rate – which ultimately saves you money.
- Seek guidance from a counseling agency approved by HUD for free. Confidential help is provided if you have trouble with paying your bills. The earlier you contact them, the more likely it is they can help you.
- Be sure to protect your private information. DO NOT give any personal information (such as social security numbers or credit card numbers) by telephone, Internet or mail unless you know the person or company.
Understanding your credit and the important role it plays for a mortgage loan will set you on the right path to reach your goals. Remember, a solid credit will provide many financial benefits, so it is well worth the effort put into maintaining it.