Credit history :: Building your credit

Mortgage Lending Guide: Building Your Credit

Building Your Credit

Before you start reading homes for sale ads and dreaming of your new home, make sure that you will be able to purchase it. Two credit issues could keep you from buying the home of your dreams.

• Poor credit
• No credit

When you have poor credit, you have to work to rebuild. If the problem is major, you might need a credit counselor, but for our purposes here we'll assume that you just have some minor black marks. 

These aren't solved quickly, and it will take time before credit reporting bureaus change their reports, so get busy right away.

Start by paying your bills! If you have some small collections that you really wanted to ignore, pay them - UNLESS they are over 7 years old.  If they are 7 years old they are uncollectible and you need to request that they be removed from your credit report. A good lender will guide you through that process.

A note of caution: Don't make a small payment on an old collection thinking you will pacify them. Every time you make a payment, the clock re-sets and the bill will remain collectable and on your credit report for 7 full years.

If you have been denied credit because of past mistakes, get started rebuilding. You may have a local business that will extend you a small credit line. Take it, use it, and make every payment on time. You can also obtain a "prepaid" credit card. 

It sounds crazy, but you can make a deposit with a credit card company and then "charge" against it. When you pay the monthly payments on time, every time, you begin to rebuild your credit rating.

Don't consolidate!

If you have several credit cards and the interest rates are rising, the temptation exists to lump all of them onto one credit card that offers a low interest rate. Resist.

This is another one of those times when things don't make sense, but they are how they are. If you have 10 credit cards each with a $5,000 limit and you carry a $2,000 balance on each, your credit will be fine as long as you make payments on time. You're only using 40% of available credit, and that looks good.

BUT if you decide to consolidate and put all $20,000 on one card with a $20,000 limit… you have now used 100% of your available credit and your score will go down.

You've still only used 40% of total available credit, but that's how the credit bureaus look at it, so that's what you're stuck with.

What if you've always paid cash?

Seems like that would make you a responsible person - one to be trusted to pay off a home loan. Nope. Again, it doesn’t make sense, but that's how it is.

Lenders want to see payment history. They want to know that you can owe a sum of money and make regular, on time payments month after month.

You can begin by obtaining and using come credit. But there is more you can do to prove your credit-worthiness to a lender.

Save paper

• If you make a rent payment, save the cancelled checks and the rent receipts. 
• Save every receipt from the electric bill, the phone bill, and the cable company
• If you have a charge account at a local store that you pay off each month, save the bill, the cancelled check, and the next month's bill showing you paid the last one.
• If you're thinking of a loan in the near future, go back through your old records, bank statements, etc. and pull out as much of this information as you can find before you visit your lender.

The more you can do to establish your own credibility and credit-worthiness, the better interest rate you'll get. And the more you do to help your lender - the better he or she will be able to help you.