Credit can be a wonderful thing, but for wannabe homeowners,
loan approval relies more on your history of debt repayment than
on your income or savings. The best way to know if your credit
history is clean is to order a copy of your credit record, preferably
before applying for a loan. Credit risk is measure by the scoring
system used by Fair, Isaac. The main criteria and their approximate
percentage of importance are:
Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
New credit - a warning of taking on too much debt (10%)
Types of credit in use (10%)
Lenders use these credit scores along with information such
as the stability of your income, your employment history, and
the value of any collateral and liquid assets, to determine your
credit risk.
Establishing Good Credit
Don't go crazy on credit. Lenders see too many credit applications
as a sign that your finances are overextended. Applying for
new accounts actually lowers your rating.
Pay down before saving up. Lenders want a track record of
responsible debt payment. Make a habit of paying your bills
always on time.
Minimize credit checks. Lenders see a red flag if too many
loan officers, credit card companies, or car dealers are requesting
your credit.
Don't take it to the limit. Lenders are wary of too many
cards, but it's also worse to see one account that's maxed
out. The ideal is to use only one or two cards with medium
balances that you pay punctually.
Hold off on purchasing "big toys". Lenders like low debt,
so hold off on purchasing a car, boat, or large appliances.
Cleaning Up Your Credit
If you've made late payments in the past, take 6 months to
1 year and make your payments on time before applying for a
loan.
Use cash whenever possible and stop charging.
Lower balances on all credit cards; as they're paid off,
close your account.
