Understanding your credit

Your credit score and credit history are key factors in determining your eligibility for a mortgage because they demonstrate that you can manage money responsibly. You should know what financial activities are affecting your credit and how lenders take your credit into account when considering you for a loan.

When you build and maintain strong credit, mortgage lenders have greater confidence when qualifying you for a mortgage because they see that you’ve paid back your loans as agreed and used your credit wisely. Strong credit also means your lender is more apt to approve you for a mortgage that has more favorable terms and a lower interest rate.

Many people use the terms credit score and credit report interchangeably, but they’re not the same.

  • Your credit score is a number that summarizes your credit profile and predicts the likelihood that you'll repay future debts.
  • Your credit report is a detailed record of your credit usage that lists your debts and whether you paid them back on time. Let us help you understand each a bit better.

Your credit report

Your credit report is a record of money you've borrowed, your history of paying it back and how much open credit is available to you. Lenders rely heavily on this information because it helps them determine the risk of doing business with you. Your credit report includes:

  • Your debts and payment history with companies that have loaned you money. This includes banks, credit card companies, mortgage companies, and other lenders or department stores. Your history shows whether you paid these bills on time and the proper amount due.

  • Public record financial information such as tax liens, bankruptcies or foreclosures, even if they happened up to 7-10 years ago.

  • Inquiries made by potential creditors or other entities, which happen when you apply for credit.

  • A list of accounts that have been referred to a collection agency due to a default.

You have a right to review your credit report, and it's recommended you do so before applying for a mortgage in case there are inaccuracies you need to correct.

Under federal law, you’re entitled to a free copy of your credit report from each of the three nationwide credit reporting companies every 12 months.

Your credit score

Your credit score helps lenders decide how likely you are to repay your debts, and it plays a significant role in you securing a mortgage. Credit scores range from 300 to 850 points and are based on the following:

  • Your payment history and ability to repay your debts on time. Late payments will lower your credit score.

  • The amount of total debt you owe, including credit cards, student loans and car loans. If your credit cards are at their limits, this can lower your credit score, even if the amount you owe isn't large.

  • How long you've used credit and how you’ve managed it. If you show a pattern of managing your credit wisely, keeping credit card balances low and paying your bills on time, your credit score will be positively affected.

  • How often you apply for new credit and take on new debt. If you've applied for several credit cards at the same time, your credit score can go down.

  • The types of credit you currently use, including credit cards, retail accounts, installment loans, finance company accounts and mortgages.

By understanding your credit and the credit evaluation systems, you’ll be on the right path to realizing your goals. Remember that your credit score and history changes over time, so you’ll need to check your score regularly and continuously work to keep it strong.