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Credit History and Credit Score

A lender considering whether to approve you for a home mortgage will examine your credit history-your record of paying back loans, including credit card bills. If you have a "good" credit history of repaying loans on time and in full, you can usually get approved for loans with lower interest rates. If you have a "bad” credit history of missing payments or paying only minimum balances, you'll typically get higher-interest loans and sometimes can't get approved for a loan at all. If you're thinking about buying a house-even years from now-make sure you maintain good credit.

Credit Reports

To find out where your credit stands, get a credit report, which details your debt and payment history. Credit reports typically include a credit score (also called a FICO score) that gives lenders a quick summary of the quality of your credit. FICO scores range from 300 (lowest) to 900 or more (highest). Generally, a score of 700 or above is considered good, while a score below 700 may hurt your chances of qualifying for the lowest possible interest rates.

To order a credit report, contact one of the three major credit bureaus-Experian, TransUnion, or Equifax. A new law entitles all Americans to one free credit report per year, available at www.annualcreditreport.com. It's a good idea to take advantage of this opportunity every year to monitor your credit and check the reports for errors.

How to Improve Your Credit

If you have a low credit score, don't despair: you can improve your credit over time. Credit reports and scores generally cover only the previous two years, though major credit issues such as bankruptcy remain on your report for 10 years. Improving your credit is largely a function of displaying good credit behavior:

  • Pay monthly bills: Pay all loans and other monthly bills promptly and in full every month.
  • Pay off credit cards: Pay off your credit card bills on time and in full every month. Never make just the minimum monthly payments on credit cards.
  • Never max out credit cards: Maxed-out cards-even if you pay them off-will make creditors question your spending habits.
  • Don't get more credit cards than you need: Holding many credit cards can suggest that you have cash flow problems, even if no problem actually exists.

If you get turned down for a mortgage even though you think your credit is great, request that the lender provide you with a written explanation. They're obligated to supply one if you ask. The explanation will identify the problems with your credit so that you know what needs improvement.

How to Get Credit Help

If you're in severe credit card or other debt and aren't sure what to do, help is available. Most localities have nonprofit credit counseling services that, for little or no cost, will help you develop a plan and budget to help you pay off your creditors and improve your credit over time. Local credit counseling services are generally listed in the phone book and in online listings.

Go only to nonprofit credit counseling services. Never trust a company that claims it can "fix" bad credit histories for a fee because these offers are often scams. Only good credit behavior over time can improve your credit.