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Your credit is an essential component of the home buying process, and having good credit lowers the cost of financing your new home. Generally, lenders rely on credit history because a correlation exists between high credit scores and low default rates. Your credit history (willingness to pay), coupled with your credit score (ability to pay), are two major factors used by lenders in deciding whether to lend you money, and under what terms, rates, and fees.

Today, not having any credit is almost on par with having bad credit. Lenders consider other financial factors like employment stability and income levels, but your credit history allows creditors to rank you against other consumers, providing an objective guide to your credit risk. If you pay all your bills with cash, or if you haven’t demonstrated your ability to handle credit payments, banks and lenders have little to go on, making it difficult to get loan approval.

What is My Credit History?

Even if you are planning your first home purchase, chances are you’ve been extended credit before. Installment payments on a car purchase, using a credit card to purchase gasoline, or getting a student loan to attend school means you’ve borrowed money and you have a credit history. Lenders or creditors provide that information to the three major credit reporting bureaus: Experian, Equifax, and Transunion. The credit bureaus gather the credit information of millions of consumers and make that information available to other lenders or creditors when you apply for credit.

Your credit report contains information personally identifying you including your social security number, address, employer, spouse’s name and date of birth. Your credit history includes account types and numbers, limits, balances, late payments, delinquencies, collections, bankruptcies, judgments, or other public records. Your credit history is evaluated by creditors examining your previous credit habits to determine:

What is the Difference Between My Credit Score and My Credit History?

Your consumer history and how you have handled your credit is summarized and scored by computer with a number that compares your payment habits with millions of consumers. You actually have three different credit scores; one each with the “Big Three” credit reporting agencies. Differences in the three scores are attributed to the different methods used by the credit bureaus in collecting your credit history. Because differences can occur, it’s essential to track what’s in each credit agency’s report and to know which reports your lender is using to evaluate your credit.

Your credit score goes up when you pay your bills on time, manage the level of debt you carry, and manage different types of debt. Your score goes down if you have too many open accounts, or you reach your credit limits. Also, frequent applications for credit cards or loans lower your score. While your credit is scored individually, lenders will also look at the credit of your spouse or co-borrower to determine loan risk.

What is FICO and Why is it Important?

Today’s lenders largely use FICO (Fair Issac Corporation) credit scores to measure your credit worthiness. While other credit scoring methods exist, Lenders rely on FICO because it’s been around the longest and provides the most historical data for comparison purposes. Since most lenders refer to FICO scores, getting a loan approved without a FICO credit score is difficult.

FICO credit score numbers range from a low end of 300, to a high of 850. High credit scores (700+) give a consumer advantage of most favorable credit terms —- low interest rates, quick decisions, more money. Low credit scores (below 600) may cost you thousands of additional dollars in interest, up front points, or other fees and expenses. Nationwide, most consumers average between 600 and 700.

How Can I Review My Credit History?

The Fair Credit Reporting Act Amendment in 2005 requires credit reporting bureaus to provide free credit reports annually to Texas consumers. AnnualCreditReport.Com, sponsored by the Big 3 credit reporting agencies, is where you can find more information about credit reports and learn about services you can purchase through the website. For a fee, you can purchase a copy of your credit score when you request a free copy of your credit report.

It’s important to review each of the three credit reports because discrepancies can occur on one credit bureau’s report that could slow or stop your loan approval and delay closing. While large discrepancies are uncommon, it’s not unusual to find small errors. Even small errors, like incorrect credit card limits, can alter your credit score. Because mistakes aren’t corrected overnight, experts recommend checking your credit before you apply for a home mortgage.

When reviewing your credit reports, verify your personal information, note which accounts are reported as open and which ones are closed. Check your balances and payment histories for accuracy, looking for any past due amounts you may have forgotten about. After reviewing your credit history, repairing small errors can be handled on your own. While many companies offer credit repair services, the Federal Trade Commission warns the public about consumer websites promoting such services in the FTC publication Credit Repair: Self Help May Be Best.

My Credit is Bad —- Do I Have Options?

Don’t think that a mortgage or homeownership is out of reach if you have credit problems. With proper documentation and explanations, you may qualify for a home loan. There are many specialists available to fit you into a mortgage product for people with credit issues. It is still important to shop around between lenders that offer loans to customers with higher credit risks. Some lenders may take advantage of the situation and saddle you with unnecessary fees if you don’t check out your options. Talk to more than one lender and don’t be discouraged from shopping around —- shopping around may save you thousands.

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