Credit here, Credit there, Credit, Credit, Everywhere:
As a potential homebuyer, you, and millions of others just like you, are probably seeking to finance your purchase through securing a loan. For some, particularly first time homebuyers, this may be the first time that you fully assessed your current credit status. For others, this may be the first time that you have come to the realization that you have no credit. As a loan officer, I whole-heartedly believe that knowledge is key, and that through education, consumers are better equipped to make proper decisions. The following is provided as a basic overview of credit—call it Credit 101. For those of you who are already well acquainted with this topic, you may want to skip to our next article!
The term ‘credit’ is used in multiple contexts, which, for some, can create confusion as to its true meaning. One can have credit, one can be granted credit, one can be issued credit, one can receive recognition as a form of credit. For purposes of securing a mortgage, you want to have credit, and preferably ‘good credit.’ To have credit, you must first establish credit. Many consumers may mistakenly believe that they have established credit simply by virtue of using a bank account, paying utility bills, or making monthly rental payments to a landlord. While making on-time payments can prevent you from developing a negative credit history, this does not necessarily mean that doing so is simultaneously establishing your credit.
Maintaining a bank account is certainly an important first step in the process of establishing credit, however, typically much more is necessary. For example, your bank may offer you an opportunity to attach a line of credit to your current bank account. You may also be provided with the opportunity to initiate a separate credit card account either through your current bank, or another financial provider. Depending on your credit history, or lack thereof, this line of credit may be either secured or unsecured. A secured line of credit will typically require some form of ‘security,’ or collateral, such as a cash deposit, or proof of an asset, such as the title to a vehicle that you own outright. If you have no previously established credit, or if you have a bad credit history, sometimes the only option is a secured line of credit. However, some financial institutions may be willing to extend a lower level line of credit, from which you can build upon, through regular use of the card, but more importantly, through consistently making on-time payments.
Another consideration in establishing and building credit, is knowing what type of information is actually provided to credit reporting agencies. You might have made regular on-time payments for a substantial period, such as rent paid to a landlord. Unfortunately this positive history is not reported to credit bureaus (Experian, TransUnion & Equifax), and therefore not useful for the purpose of establishing credit. However, if you fail to make a payment to your landlord, and this debt is later reduced to a judgment, this negative history may be provided to credit bureaus. Likewise, while regular payments to utility providers, cell phone companies, and the like, are not the type of positive history included on your credit report, if you fail to make a payment, and the matter is sent to a debt collector, this negative history may be reflected on your credit report.
If you have any questions regarding establishing or building your credit, I would like to help!
Contact Casey Moseman at (702) 271-1274.