Credit scores are enormously important to both borrowers and mortgage lenders. In the same way that doing better in work, sports or at school produces real benefits, the same is true with credit scores.
With good credit you can borrow more and pay less. With a mortgage, a borrower with solid credit might pay the best available rate while someone with poor credit might pay an additional 1.5 percent. That doesn't sound like a big deal, but on a $300,000 mortgage you're looking at an additional annual cost of as much as $4,500.
There are a lot of questions concerning good credit and how to get it. Here are 10 basics that come up with great frequency.
1. I finished college a few years ago and did not pay a lot of bills. Now I want to buy a house. How can I improve my credit?
Negative items remain on credit reports for seven years (bankruptcies stay on for 10 years). However, mortgage lenders are particularly interested in your recent credit behavior, what you've done in the past two years or so.
To change your credit profile you need to make a point of paying every bill in full and on time. No exceptions. Your credit score will quickly improve.
2. Is it true you need a big income to get a good credit score?
No. Credit scores and credit reports do not show your income at all. This is why loan applications separately ask about income and assets. The issue with credit is not how much you earn, but whether you honor repayment obligations. It's perfectly possible for someone making $45,000 a year to have a vastly better credit rating than someone who makes $200,000.
3. Can I use a federal employer number instead of a social security number to get a better credit rating?
No. Using an employer ID instead of a social security number to get credit may be illegal, a crime called "credit substitution." It's also foolish. No lender is going to accept an employer ID number. If someone suggests using an employer ID to get a mortgage, go elsewhere for advice.
4. If I have a strong payment history should I borrow a lot?
No. You should borrow both no more than you need and as little as possible. Credit scores consider the amount you owe as well as the credit available to you. Hitting credit card limits is a black mark and will reduce credit scores.
5. Is it better to have lots of credit cards or just one or two?
If you reduce the number of cards you have by combining accounts and debts, you might actually get a lower score. There are two issues to consider:
First, you have to watch credit limits. The general ideas is that the more of your available credit that you use the lower your score. For instance, imagine that you have five credit cards with different limits and in each case you have used 50 percent of the amount available to you. You then combine all cards into one card with a big balance but now you're using a far-higher percent of your available credit line, say 90 percent. A better approach is to keep balances low and pay off credit cards as you can.
Second, while it makes sense to pay down credit card debts, it may not make sense to close accounts. The reason has to do with credit card history. The general rule is that the longer your history, the higher your score. The result is that you may actually want to keep older accounts open even if they're not used.
6. I'm good about paying off credit cards but not some other bills. Will this impact my credit?
Yes. First, many credit cards include a so-called "universal default" provision. This means if any bill is late or unpaid, the credit card issuer can raise your rate. Second, other bills in addition to credit cards show up on credit reports and negative items are reflected in credit scores.
7. My mortgage payment is due on the 1st of the month but I'm allowed to pay as late as the 15th without penalty. If I pay on the 14th will this show up on my credit report?
No -- but be careful here. A debt is considered "late" for credit reporting purposes only if it's at least 30 days overdue. However, some unscrupulous lenders charge excessive fees and may even raise interest rates if payments are even a day late. If you have such financing you should consider refinancing to get better terms.
As to that mortgage payment, lenders typically provide a payment grace period because checks may be delayed in the mail and payment days may fall on weekends or holidays. However, since the bill must be paid anyway, it's absolutely best to pay either early or on time.
You may find if you have a good payment record with mortgage lenders that they will be helpful if you run into problems. Example: Your mortgage payment is delayed in the mail and arrives after the grace period. A late fee is charged. You call the lender, they look at your payment history, conclude something is wrong and waive the fee. In other words, you get the benefit of the doubt because you're credible.
Does this happen? You bet.
8. How often should I check my credit?
Given the growing problem of identity theft -- the Federal Trade Commission says there were more than 250,000 complaints last year -- it makes sense to check credit reports regularly. The good news is that you can get three free credit reports per year, one from each of the major credit reporting agencies, without charge, by going to AnnualCreditReport.com.
In addition, the Federal Trade Commission says under federal law "you're entitled to a free report if a company takes adverse action against you such as denying your application for credit, insurance, or employment and you ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company. You're also entitled to one free report a year if you're unemployed and plan to look for a job within 60 days; if you're on welfare; or if your report is inaccurate because of fraud, including identity theft."
9. What should I do if I feel a payment will be late?
Many creditors such as mortgage lenders, credit card companies, auto finance organizations and utilities now have several options for quick payments. You may be able to pay online, pay over the phone or pay by overnight delivery..
However, it's wise to get quick payment information now, before it's needed. For instance, some creditors have one address for regular payments and another for overnight deliveries.
If you feel a payment will not be made or will be more than 30 days late, contact your lender immediately. It's often possible to work out an accommodation if you begin working with the lender as soon as possible.
10. Can I get a mortgage after a foreclosure or bankruptcy?
Foreclosure and bankruptcies are serious matters which are likely to make access to mortgage financing difficult if not impossible for several years. However, some borrowers are able to get mortgages again with some speed.
How? While foreclosures and bankruptcies are the worst credit events, they are not necessarily caused by consumer mismanagement or misdeeds. People have health emergencies. Companies close. Areas are devastated by natural disasters.
The bottom line is this: Mortgage underwriters want to know more about you and your situation. While loans may be approved automatically, declined loans are reviewed individually. Before looking for a home, speak with mortgage lenders if you have had a foreclosure or bankruptcy.
If you had a good credit record and encountered a financial catastrophe outside your control, lenders may be able to provide financing once credit has been re-established. Individual lenders can provide specific advice and information.
As the expression goes, it can't hurt to ask.
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Peter G. Miller is a syndicated real estate and personal finance columnist who appears 70 newspapers.
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