Why Your Credit Is Important
How credit affects your loan options
How buying can improve your financial situation
Check your credit report
Credit is Very 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.
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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.
Buying a home when you've had credit challenges
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:
• Establishing a strong payment record. Paying your mortgage on time every month goes a long way toward showing creditors that you can manage debt effectively.
• Building wealth for your future. Each time you make a mortgage payment, not only do you improve your credit, you also build home equity that you can leverage to reach your goals.
How to better your credit!
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.
Check your credit report for errors
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:
• Order a copy of your credit report from one or more of the three major credit bureaus.
• Review each account on your report to make sure it actually belongs to you, or did at one time.
• If an account that you no longer have is listed as open, contact the creditor and ask them to report it as closed.
• If an entry is inaccurate, ask the credit bureau to investigate. They should give you a response within 30 days.
Change the way you think about credit
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.
Consolidate your debt
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:
• Simplicity. Instead of a steady stream of bills in the mail — each with a different payment amount and due-date — you receive a single statement each month.
• Lower payments. Because they are secured by your home, home loans generally carry lower rates than most other types of credit. That means you'll have lower monthly payments and a chance to put money into savings.
• Tax savings.* Unlike credit cards and installment loans, interest on home loans is usually tax-deductible. And because monthly payments at the beginning of the loan term are mostly interest, you could enjoy substantial tax savings early on.
* Ask your tax advisor about the deductibility of mortgage interest.
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