Statistics show that a vast majority of Americans downplay the critical importance of good credit. But having a poor credit history in this area of your life can be the biggest obstacle to home ownership or mortgage refinancing.

Having poor credit can seriously impact your life. Many consumers don't realize the significance of good credit until it's too late. Despite having a great job and a high income, you can-and probably will-be denied a mortgage if your payment history is sketchy. It can immediately block your path to home ownership. Even those with bad credit who aren't rejected outright will likely pay higher rates. That can make a difference of tens of thousands of dollars over the life of a mortgage.

There are painless ways to avoid this hurdle. It begins with an understanding of how your credit rating works, and how it can affect your ability to borrow money.

Understanding your credit history

Here are some of the factors that contribute to your credit profile:

  • How long you've had credit, and how often you've borrowed and successfully paid back loans.
  • If you've paid your bills in a timely manner, or if you've ever defaulted.
  • How much credit you've been offered by stores, banks, or credit card companies, compared to the total amount you have used or now owe.
  • Bankruptcy or foreclosure, even if they were caused by a spouse who may now be an ex-spouse.

Credit repair

To ensure that you qualify for the mortgage you want, there are simple steps you can take to bolster or preserve your credit rating:

  • Order a copy of your credit report from one of the nation's three major credit reporting bureaus (Expedia, Experian, TransUnion).
  • Once you've examined the report, you'll have the chance to provide corrections, challenge inaccurate entries, or record your own explanations. Your response will appear in the report when anyone requests it, so your side of the story will be told.
  • Believe it or not, having no debt and no history of borrowing can be a problem. If you have no track record, creditors don't know how to evaluate your performance. Borrow enough to build up a credit history, and do it responsibly.
  • Avoid using all of your available credit. If your credit card limit is $2,000, for example, keep the card, but only use it to pay a monthly bill for $50 or $100. Pay off the whole balance before the due date each month. These small steps will help you climb the ladder to a higher rating.

Even if you have had trouble in the past, your current credit history has the potential to outweigh any past financial problems. Just start paying bills on time and following the other practices outlined above. Before long, you'll have solid credit and can easily qualify for a mortgage loan.

Published on August 4, 2008