Credit is a financial tool that enables you to buy things now without paying for them all at once. Your ability to use credit responsibly and repay creditors on time has a lot to do with how much access to credit you will have in the future. Building a solid credit history gives you more buying power when you need it, and that can be especially valuable when you are buying a home.
How credit affects your loan options
When you apply for a loan, the lender will evaluate your credit history to see how you have managed credit in the past, and then use that information to determine how likely you are to keep up with payments in the future. By predicting how well you will manage your debt, the lender can measure the risk involved with lending you money.
Everything else being equal, someone who has consistently made payments on time is a lower credit risk than someone who has not. Because lenders usually offset risk with higher financing charges, having a better credit history generally means getting more favorable loan terms. And because some loan options are riskier than others, good credit may give you more flexibility in structuring your mortgage.
Buying a home when you’ve had credit challenges
Many people believe that they can’t buy a home unless they have great credit. While it’s certainly helpful, a flawless credit history is not a requirement for buying a home. In fact, homeownership can be a tool for getting past credit difficulties.
- Buying a home gives you an opportunity to improve your financial situation by:
- Establishing a strong payment record. Paying your mortgage on time every month goes a long way toward showing creditors that you can manage debt effectively.
- Building wealth for your future. Each time you make a mortgage payment, not only do you improve your credit, you also build home equity that you can leverage to reach your goals.
- If you have less-than-perfect credit, 123Loans has loan programs that can help you become a homeowner.
Before lending you money, creditors need to determine how likely you are to pay it back. One way to do that is by examining your past use of credit, which is recorded on your credit report(CRA).
Whether you need to rebuild a damaged credit history or simply maintain your solid rating, here are some things you can do to achieve your goal.
Change the way you think about credit
Having credit cards and loans that you pay regularly helps you get more credit. At the same time, having credit available often brings the temptation to buy things you can’t really afford. The key to good credit management is in finding a comfortable middle ground.
To guard against overspending, try to think of credit as a tool that gives you more financial freedom — not more stuff.
Consolidate your debt
If you are overextended with credit and living month-to-month, debt consolidation might make your payments more manageable. By paying off multiple credit accounts using a refinance or home equity loan, you can take advantage of three valuable benefits:
- Simplicity. Instead of a steady stream of bills in the mail — each with a different payment amount and due-date — you receive a single statement each month.
- Lower payments. Because they are secured by your home, home loans generally carry lower rates than most other types of credit. That means you’ll have lower monthly payments and a chance to put money into savings.
