Credit Issues: What You Need to Know

Good Credit, Bad Credit

Before you apply for a mortgage loan, it is a good idea to check out your credit report. (Order a copy of your credit report now.) You should make sure that all of the information on it is accurate. If not, you can write the credit reporting agency to have any errors investigated and your report cleared of incorrect information (this process may take several months, so make sure to do this in advance). Your interest rate and available loan programs are determined by your credit grade. Try our credit grade calculator to give you a better idea of how to grade your credit. Just because your credit report has dings in it, late payments, charge-offs or judgments, doesn't mean you can't qualify for a mortgage loan. If your credit has significant damage your rate may be higher than if you had perfect credit, but lending institutions tend to place more importance on your recent credit history than on older dings, so buying your home at a slightly higher rate and working to establish good credit often pays off when you can refinance your mortgage into a lower interest rate, sometimes in as little as a year. In the meantime you are building equity and a good credit history. If you are considering getting a new mortgage it is best to keep your debt ratio as low as possible. Lending institutions look at your overall debt ratio (amount of debt in relation to salary) to determine how much they are willing to lend you, so it might be a good idea to put off buying that new car for a little while. A few facts you should know about credit and mortgages. Most recent credit history counts most. This is important for a number of reasons. First because establishing good credit now will have more impact than much older past credit problems. It also means that a past good credit history will be overshadowed by recent credit problems, so if you are having trouble with excessive bills now, you might want to consider a debt consolidation loan before matters get out of hand. It also means that if you have past charge-offs that you might want to get your mortgage broker's advice before you decide to make a few small payments on them. This might seem illogical, but making payments on an old collection or charge-off may actually make things worse, because it makes the problem more current. Your broker will advise you on the right time to take care of those accounts and might even be able to roll the account payoffs into your loan. Having your credit pulled repeatedly will hurt your credit score. Having too many lenders pull your credit will actually lower your score and may push your credit grade into a lower category thus raising your interest rate in the end. Having the right kind and right amount of debt matters. Lenders don't want you to have too much debt but... Longer trade histories help your credit score. Having too much debt may lower the amount of loan for which you qualify, but many people rush to pay off and then close all of their old accounts. While having too many accounts open doesn't look good, your credit score is improved by having older accounts with a long credit history so closing an account in good standing that you have had for ten years might not benefit you. If you have many accounts open, you might want to close some, just make sure that you don't close your oldest and keep only your newer credit cards. You also might consider closing, not just dormant accounts, but accounts with balances. You can close an account and continue paying on the balance and this may help raise your credit score. They do want a certain number of open accounts. Most lending institutions want at least 12 months of a credit history with each account. Even if you are low on trade lines (most lenders want at least 3-5), opening new accounts won't do you any good because they won't be "seasoned" enough for lenders to count them. Instead, an experienced mortgage broker should be able to find a way to get a lending institution to consider the credit history that you do have. This also means that it is often not in your best interest to constantly transfer your credit balances to new accounts in order to take advantage of the low introductory rates. All credit is not equal. Lending institutions judge certain types of debt as better than others. Overall, mortgage loans and other installment loans are considered more positive than revolving credit card debt because they are closed credit, meaning you are in the process of paying them down and lenders don't have to consider the risk of you charging them higher. Major credit cards, such as MasterCard or Visa, are better than financing companies or department store credit cards. Since those chain store credit cards often have much higher rates anyway, it is better not to carry a lot of them. All debt is not equal even when comparing the same type of debt. When it comes to credit card debt, it does not look favorable to lenders, or your credit report, if you have high balance to limit. Having debt on one or two maxed out credit cards will hurt your credit more than having that same debt spread out on three or four credit cards with room left on the credit limit. No matter what your credit background, it is best to be honest and upfront about it in the beginning. A rate quote based on inaccurate information is worthless, and filling your mortgage broker in helps save you valuable time by having them shop the best programs for your situation.