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For
generations, owning a home has been a big part of the
"American dream." One critical element you need to
realize this dream is developing and maintaining good
credit. |
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What is credit?
Why is having good
credit so important?
Why not pay cash?
Does it matter
how many credit cards I have?
What happens if
I don't make payments on time?
How are late
payments defined?
How does a potential
lender know if I have good credit?
What appears on
my credit report?
Can I get a copy of my
credit report?
How does a
potential creditor evaluate the information on my credit
report?
What
factors influence my credit score
What is a "good"
credit score?
Can I change my
credit score?
Does a lender take
anything else into consideration when I apply for a
loan?
What can I do if I
don't have credit?
Can I "start over"
by declaring bankruptcy and clearing away all my old
debt?
Can someone
help me "fix" my credit? |
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What is credit?
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When you borrow
money, you are given credit. Credit simply means you are
using someone else's money to pay for things. Getting
credit also means you are making a promise to pay the
money back, usually with interest. Interest is
additional money you pay for the privilege of borrowing
money. |
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Why is having good credit so
important?
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Establishing and
maintaining a good credit history helps you get a loan
when you want one. In addition, it also gives you more
control when shopping for loans. When you have good
credit, you are more likely to receive favorable loan
terms and pay less interest than someone who does not
have a good credit history. |
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Why not pay with cash?
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Paying cash for
things such as clothes and household items is generally
a good idea. However, using credit cards for larger
purchases, such as an appliance, can help you establish
credit. Making monthly payments and paying off balances
in a timely manner will provide you with a good credit
history that will help when making larger purchases,
such as cars and homes. |
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Does it matter how many credit
cards I have?
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Yes. Every credit
card company allows you a specific amount of money to
spend. This is called a credit limit. Having numerous
credit card accounts open, however, may affect your
ability to get a loan. Although the accounts may have
low or no balances, a potential lender considers all
available credit limits when deciding if you would be a
good credit risk. |
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What happens if I don't make
payments on time?
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Making payments late
costs you money. Each time you pay after your due date,
you may have to pay penalties or late fees. In addition,
a history of making late payments may ultimately cost
you by having to pay higher interest rates on subsequent
loans. For example, someone with good credit may get a
mortgage with an 8 percent interest rate, while someone
with poor credit past may have to pay 15 percent or
more. If each borrows $100,000 over 30 years, the 8
percent borrower will pay $164,155 in interest and the
15 percent borrower will pay $355,200. That's a
difference of $191,045. |
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How are late payments defined?
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Generally, a payment
is considered delinquent if it's received 30 days past
its due date. A mortgage payment, however, is considered
late when it's received 15 days after its due date. If
an account is 60 or 90 days late, it's considered a
serious delinquency. When applying for a mortgage, it is
preferable not have any late rent or mortgage payments
in the past 12 months since that could affect your
interest rate. |
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How does a potential lender know if I have good
credit?
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The primary source a
potential lender uses to evaluate your credit is a
credit report. When you open a new credit account or
borrow money, the company you do business with may
report information about your repayment history to one
or more credit-reporting agencies. The credit-reporting
agencies, in turn, make this information available to
potential lenders. |
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What appears on my credit report?
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The typical credit
report includes four types of information: personal
information, credit information, public record
information, and inquiries.
The personal information includes your name, current and
previous addresses, telephone number, social security
number, date of birth, and current and previous
employers.
Credit information includes the date opened, credit
limit or loan amount, balance, and monthly payment
amount for all loans and lines of credit. The report
also shows your payment history during the past several
years and the names of anyone else responsible for
paying the account, such as a spouse or a co-signer.
Public record information includes any bankruptcy
records, foreclosures, tax liens for unpaid taxes, and
monetary court judgments (such as lawsuits).
Inquiries show when someone has obtained a copy of your
credit report and every time you have applied for credit
in the past two years. The number of inquiries on your
report is important to your potential lender,
particularly if you have had several recent inquiries. A
lot of inquiries might indicate a danger of becoming
overextended on your credit. |
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Can I get a copy of my credit report?
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Yes. You should
request a copy of your credit report at least once a
year to verify that all the information is correct
because reporting mistakes might occur. To get a copy of
your report, call or write to one or more of the
following credit-reporting agencies.
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Trans Union
Corporation
P.O. Box 34012
Fullerton, CA 92834
1-800-916-8800
www.transunion.com
Experian (formerly TRW)
P.O. Box 2104
Allen, TX 75013-2104
1-800-682-7654
www.experian.com
Equifax
P.O. Box 740256
Atlanta, GA 30374
1-800-685-1111
www.equifax.com
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The information on
your credit report may vary from one credit-reporting
agency to another because not all creditors report
information to each agency. For this reason, you may
want to get a report from each agency. Depending on
where you live and your circumstances, you may have to
pay a small fee for a copy of your credit report. |
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How does a potential creditor
evaluate the information on my credit report?
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Most creditors,
including mortgage lenders, use a credit score generated
from information on your credit report. A credit score
is a statistical measurement used to predict how likely
you are to repay a loan based on experience with
millions of consumers. As a result, it provides a fast
and objective way to evaluate your credit history. |
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What factors influence my credit
score?
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Any action you take
regarding your credit practices influences your credit
score. For example, if you regularly make payments on
time every month, that will positively influence your
score. Conversely, if you tend to maintain maximum
balances on your credit cards, and make minimum
payments, that will negatively influence your score. At
any given time, your credit score is calculated by
weighing all positive and negative points. |
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What is a "good" credit score?
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Generally speaking,
when you have a high score, you are considered a better
credit risk. The specific range of scores depends on the
credit scoring software used and the guidelines
established by the lender. A typical range of credit
scores, however, usually falls between 500 and 800. A
credit score that falls between 650 and 800 is more
favorable. |
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Can I change my credit score?
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Yes, in fact you are
the only person who can change your credit score. If you
have scored poorly, you can make a concerted effort to
improve your score by paying off loans, reducing credit
card balances and making monthly payments on time. After
a period of time, generally a year or two, such positive
practices will be reflected in your credit score. |
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Does a lender take anything else
into consideration when I apply for a loan?
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Yes, although
lenders rely heavily on credit scores, other factors are
taken into consideration. Included in your evaluation
may be your job history, income, savings and checking
accounts, the types of loans you currently have, and the
type of mortgage loan you want. |
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What can I do if I don't have credit?
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If you don't have
credit as reported by the credit-reporting agencies,
most lenders will accept other sources of credit. Other
sources or "alternative credit" includes bills that you
have paid on a regular basis, such as rent, utility
payments, cable TV, or monthly insurance payments. Any
of these creditors should be able to provide you with a
"credit reference" to document your payment history. |
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Can I "start over" by declaring bankruptcy and
clearing away all my old debt?
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Declaring bankruptcy
does not automatically allow you to "start over." If you
have declared bankruptcy, had a car repossessed, had a
house foreclosed on, or have not paid a loan, it will
likely have a major effect on your ability to get a new
loan. Information about a foreclosure or repossession
can stay on your credit report for seven years and a
bankruptcy for up to 10 years. |
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Can someone help me "fix" my
credit?
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If you are having
problems paying your debts, you may want to seek help
from a not-for-profit credit counseling organization.
Such organizations can work with you and your creditors
to set up repayment plans at little or no cost.
When seeking advice, however, you may want to stay away
from "credit repair" or "credit consolidation" companies
that offer to "fix" your credit history for a fee. It
can't be done. Only you can repair a bad credit history
by repaying your debts and making your monthly payments
on time. |
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