| The next step in readying yourself to resolve your home loan is to examine and evaluate your credit standing.In this section of the site, you'll find answers to many questions you may have about credit:
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What is credit?
Credit permits you to obtain something now for little or no money out of your pocket, and pay for it over a specific period of time. Today, almost everyone uses credit in one form or another.
Open-end credit is extended on an ongoing basis, but usually with a limit on how much you may borrow. It is often referred to as revolving credit in that as you repay the balance due, credit up to a specified limit is then available to you again to use at anytime in the future. Credit cards, such as VISA and MasterCard, are the most common form of open-end credit.
Closed-end credit is extended on a one-time, limited basis, such as a car loan or a personal loan. Although you may still have a positive relationship with the lender after paying off the obligation, you still must requalify each and every time you want another loan.
Where does credit come from?
Credit is most frequently extended by department stores, finance companies, oil companies, credit unions, commercial banks and credit card companies. Those who extend credit are called creditors.
- you as a credit risk.Each creditor has different ways of evaluating applications for credit. By reviewing various factors such as income, length of employment, how long you?ve lived at one residence, previous credit history, amount of outstanding debts, stability of your checking and savings accounts, number of dependents, and so on, creditors can determine, to a certain degree, whether you will repay the amount borrowed over a certain period of time.
- the collateral you are purchasing. If you fail to make payments on collateral purchased with credit, it?s easier for a creditor to repossess items like furniture and appliances than to foreclose on a home. The interest rate for installment debt is much higher than the interest rate for mortgage loan debt and affords the creditor the opportunity to assume a higher level of overall risk in the event of nonpayment. Therefore, credit may be extended to even those with a questionable ability to pay when it comes to purchases like refrigerators and stereo systems. Where a home has been posted as collateral for a loan, the foreclosure process can be costly and time-consuming. The lender assumes a greater amount of risk at a lower interest rate. Therefore, the lender is going to evaluate you and your credit history more carefully when you?re trying to buy a house. Unfortunately, this is where most people learn their first real credit lesson ? when credit is really important ? because they are stunned and surprised when denied, based on their credit card use.
- Late payments affect your credit history. It doesn?t matter that the credit card balance is only $5, or that the payment is only one day late, or that you pay the late fee. Failure to pay on time will put a black mark on your credit history, a black mark that will last for a year or more.
- Minimum payments are another trouble spot. While making the minimum payment ? generally about 2% to 3% of the outstanding balance ? is acceptable, it does very little to reduce your outstanding debt. ??Say, for example, you buy a $2,500 computer using a credit card, and make the minimum payment of $50 per month. Assuming you don?t make any additional purchases with that credit card, how long do you think it will take you to pay for that computer? Would you believe EIGHT YEARS?! It?s true. By the time you?ve paid for the computer, you?ll probably be using it as a doorstop.
- Don?t assume you have a great credit history just because of the continuous offers for revolving credit you receive in the mail. Make sure that you have credit when you need it for a mortgage or a personal loan. You don?t want to be denied due to poor history or overextension of credit cards. What is more valuable ? a house or a sweater? It?s up to you.
- Use credit effectively. Determine how much credit you can comfortably afford ? 15% to 20% of your take-home pay is a good rule of thumb. Develop a household budget ? a detailed list of your income and expenses. If you find that you cannot afford credit purchases, considering your current income and expenses, you should still concentrate on establishing good credit, but continue making most of your purchases using cash. Credit purchases should generally be limited to those that can be paid off at the end of the month. Larger purchases should be evaluated based on need, a usable life (remember the computer) and a payment schedule established to assure that the debt is paid off quickly.
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