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Credit Guide

Learn what to know and understand about your credit

What You Should Know About Credit

For generations, owning a home has been a big part of the "American dream." One critical element you need to realize this dream is developing and maintaining good credit.

At ERA Mortgage, it is our mission to treat our customers — and potential customers — like members of our own family. In doing so, we want to help you understand why having good credit is so important — especially when pursuing the American dream of home ownership.

What is credit?

When you borrow money, you are given credit. Credit simply means you are using someone else’s money to pay for things. Getting credit also means you are making a promise to pay the money back, usually with interest. Interest is additional money you pay for the privilege of borrowing money.

Why is having good credit so important?

Establishing and maintaining a good credit history helps you get a loan when you want one. In addition, it also gives you more control when shopping for loans. When you have good credit, you are more likely to receive favorable loan terms and pay less interest than someone who does not have a good credit history.

Why not pay with cash?

Paying cash for things such as clothes and household items is generally a good idea. However, using credit cards for larger purchases, such as an appliance, can help you establish credit. Making monthly payments and paying off balances in a timely manner will provide you with a good credit history that will help when making larger purchases, such as cars and homes.

Does it matter how many credit cards I have?

Yes. Every credit card company allows you a specific amount of money to spend. This is called a credit limit. Having numerous credit card accounts open, however, may affect your ability to get a loan. Although the accounts may have low or no balances, a potential lender considers all available credit limits when deciding if you would be a good credit risk.

What happens if I don't make payments on time?

Making payments late costs you money. Each time you pay after your due date, you may have to pay penalties or late fees. In addition, a history of making late payments may ultimately cost you by having to pay higher interest rates on subsequent loans. For example, someone with good credit may get a mortgage with an 8 percent interest rate, while someone with poor credit past may have to pay 15 percent or more. If each borrows $100,000 over 30 years, the 8 percent borrower will pay $164,155 in interest and the 15 percent borrower will pay $355,200. That's a difference of $191,045.

How are late payments defined?

Generally, a payment is considered delinquent if it's received 30 days past its due date. A mortgage payment, however, is considered late when it's received 15 days after its due date. If an account is 60 or 90 days late, it's considered a serious delinquency. When applying for a mortgage, it is preferable not have any late rent or mortgage payments in the past 12 months since that could affect your interest rate.

How does a potential lender know if I have good credit?

The primary source a potential lender uses to evaluate your credit is a credit report. When you open a new credit account or borrow money, the company you do business with may report information about your repayment history to one or more credit-reporting agencies. The credit-reporting agencies, in turn, make this information available to potential lenders.

What appears on my credit report?

The typical credit report includes four types of information: personal information, credit information, public record information, and inquiries.

The personal information includes your name, current and previous addresses, telephone number, Social Security number, date of birth, and current and previous employers.

Credit information includes the date opened, credit limit or loan amount, balance, and monthly payment amount for all loans and lines of credit. The report also shows your payment history during the past several years and the names of anyone else responsible for paying the account, such as a spouse or a co-signer.

Public record information includes any bankruptcy records, foreclosures, tax liens for unpaid taxes, and monetary court judgments (such as lawsuits).

Inquiries show when someone has obtained a copy of your credit report and every time you have applied for credit in the past two years. The number of inquiries on your report is important to your potential lender, particularly if you have had several recent inquiries. A lot of inquiries might indicate a danger of becoming overextended on your credit.

Can I get a copy of my credit report?

Yes. In fact, you should request a copy of your credit report at least once a year to verify that all the information is correct because reporting mistakes might occur. To get a copy of your report, call or write to one or more of the following credit-reporting agencies.

Trans Union Corporation
P.O. Box 34012
Fullerton, CA 92834
1-800-916-8800
www.transunion.com

Experian (formerly TRW)
P.O. Box 2104
Allen, TX 75013-2104
1-800-682-7654
experian.com

Equifax
P.O. Box 740256
Atlanta, GA 30374
1-800-685-1111
www.equifax.com

The information on your credit report may vary from one credit-reporting agency to another because not all creditors report information to each agency. For this reason, you may want to get a report from each agency. Depending on where you live and your circumstances, you may have to pay a small fee for a copy of your credit report.

How does a potential creditor evaluate the information on my credit report?

Most creditors, including mortgage lenders, use a credit score generated from information on your credit report. A credit score is a statistical measurement used to predict how likely you are to repay a loan based on experience with millions of consumers. As a result, it provides a fast and objective way to evaluate your credit history.

What factors influence my credit score?

Any action you take regarding your credit practices influences your credit score. For example, if you regularly make payments on time every month, that will positively influence your score. Conversely, if you tend to maintain maximum balances on your credit cards, and make minimum payments, that will negatively influence your score. At any given time, your credit score is calculated by weighing all positive and negative points.

What is a "good" credit score?

Generally speaking, when you have a high score, you are considered a better credit risk. The specific range of scores depends on the credit scoring software used and the guidelines established by the lender. A typical range of credit scores, however, usually falls between 500 and 800. A credit score that falls between 650 and 800 is more favorable.

Can I change my credit score?

Yes, in fact you are the only person who can change your credit score. If you have scored poorly, you can make a concerted effort to improve your score by paying off loans, reducing credit card balances and making monthly payments on time. After a period of time, generally a year or two, such positive practices will be reflected in your credit score.

Does a lender take anything else into consideration when I apply for a loan?

Yes, although lenders rely heavily on credit scores, other factors are taken into consideration. Included in your evaluation may be your job history, income, savings and checking accounts, the types of loans you currently have, and the type of mortgage loan you want.

What can I do if I don't have credit?

If you don't have credit as reported by the credit-reporting agencies, most lenders will accept other sources of credit. Other sources or "alternative credit" includes bills that you have paid on a regular basis, such as rent, utility payments, cable TV, or monthly insurance payments. Any of these creditors should be able to provide you with a "credit reference" to document your payment history.

Can I "start over" by declaring bankruptcy and clearing away all my old debt?

Declaring bankruptcy does not automatically allow you to "start over." If you have declared bankruptcy, had a car repossessed, had a house foreclosed on, or have not paid a loan, it will likely have a major effect on your ability to get a new loan. Information about a foreclosure or repossession can stay on your credit report for seven years and a bankruptcy for up to 10 years.

Can someone help me "fix" my credit?

If you are having problems paying your debts, you may want to seek help from a not-for-profit credit counseling organization. Such organizations can work with you and your creditors to set up repayment plans at little or no cost.

When seeking advice, however, you may want to stay away from "credit repair" or "credit consolidation" companies that offer to "fix" your credit history for a fee. It can't be done. Only you can repair a bad credit history by repaying your debts and making your monthly payments on time.