Understanding Your Credit
If you have ever taken out a loan to buy
something—a car, for example—you were given credit.
Credit means you are using someone else’s money to
pay for things. It also means you are making a
promise to repay the money (the loan) to the person
or company that loaned you the money (the creditor
or lender).
A loan usually includes both principal (the amount
of money you borrowed) and interest (the additional
dollars you pay for the privilege of borrowing the
money). Because a loan is a legal obligation, it is
important to understand how you must repay it.
Good credit means that you make your loan
payments on time and you repay your debts as
promised. Good credit is important because it makes
it more likely that you can get a new loan in the
future when you want to make a major purchase, such
as a car or a home. When you have a good credit
record, lenders feel more confident that you will be
willing and able to pay back the new loan.
It’s true that you need good credit to buy a
home, but you don’t need perfect credit. If you
don’t have good credit right now, don’t get
discouraged. You can use the ideas in this guide to
start improving your credit.
It may take some time, but you will be far better
off if you improve your credit before you apply for
a home mortgage loan or other large purchase. This
is important because if you have a habit of not
paying your bills on time, or have a lot of debt,
you may not qualify for a mortgage loan. Or the
lender may give you a loan, but with a larger down
payment requirement or at a higher rate of interest.
If you pay a higher rate, you could end up paying
thousands of dollars more in interest for your home.
A credit report is a record of how you have paid
your credit card debt and other loans. A credit
report shows how much debt you have, if you have
made payments on time, or if you have not paid back
some loans at all. Credit reports do not show
information about your race, religion, medical
history, personal lifestyle, political preferences,
criminal record or any other information unrelated
to credit.
Credit reports are compiled by national
credit-reporting agencies. The typical credit report
includes four types of information:
1. Identifying information: your name, current
and previous addresses, telephone number, Social
Security number, date of birth, and current and
previous employers. This information comes from your
credit applications.
2. Credit information: specific details about
your credit cards, student loans, and other loans.
This information includes the date opened, credit
limit or loan amount, balance, and monthly payment.
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. Late payments, skipped payments,
accounts turned over to a collection agency, and
repossessions appear here. This information comes
from companies you do business with.
3. Public record information: bankruptcy records,
foreclosures, tax liens for unpaid taxes, monetary
court
judgments (such as lawsuits), and, in some states,
overdue child support. This information comes from
public records.
4. Inquiries: the names of those who obtained a
copy of your credit report and how often you have
applied for credit in the past two years. When you
order a credit report, you may also see the names of
companies that have reviewed your report for
“pre-approved” credit offers. However, these names
will not be given to creditors who request a copy of
your report. Creditors only see the inquiries you
initiate (by applying for a new credit card, for
example).
Creditors rely on this information about how
you’ve handled your loans in the past to decide how
likely you are to repay a new loan. When you apply
for credit or a loan, you give the creditor
permission to order your credit report from a
credit-reporting agency.
The best way to know what your credit report
shows is to order one and review it carefully. It’s
a good idea to order your credit report once a year
to make sure there are no errors on it. You can
order your credit report from any of the major
creditreporting agencies listed to the right. When
you order your report, have ready your Social
Security number, date of birth, current and previous
addresses for the past five years, and maiden name,
if applicable.
You can view the entire guide by going to:
http://www.homebuyingguide.com
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