Managing Credit To Keep Your Mortgage Affordable
Credit is something that most people know about
, but only in passing. Let's face it: you don't spend every waking moment of your day thinking about your credit in the same way that you might be thinking about your mortgage, car loan, or credit cards. Unfortunately, since most people don't properly manage their credit, their left almost completely in the dark.Luckily for us, managing your credit is actually surprisingly easy. It comes down to a few basic elements: knowledge, debt, payment, and credibility.
As we all learned from the late 1980's cartoon "GI JOE", knowledge is half the battle. Simply knowing your credit report can put you ahead of most of the general population, and it can give you enormous insight as to how you appear from a lenders perspective. Be sure to obtain a copy of your credit report from one of the three major credit bureaus (Equifax, Transunion, and Experian). Once you have obtained your credit report (which should include items such as your standing debt/loans, FICO score, and other misc. notes/comments left by financial institutions and lenders) you can focus on proper credit management.
Your debt, as reported by your credit report, will be a representation of how you appear financially to a prospective lender. You will not find your random expenses, such as your utilities or other bills, but you will find all of your revolving payments, credit cards, loans, and mortgages. You want your debt load to be roughly half of your available credit or lower. If you have $100,000 in credit, you should maintain a balance of $50,000 or less. Maxing out your credit will take significant tolls on your credit.
Once you are aware of your debt as seen from a lenders perspective, payment is your next priority. Focus on repaying high interest accounts first, and gradually shave your debt away. Paying three or four times your minimum payments is an effective way to do this, and while it may mean that you will have to live a little lighter for a while, the long-term benefits are significant.
Lastly, your credibility is reflected by your payment history, delinquency rate, and overall debt load. Missing payments, being late for payments, or defaulting on loans will take chunks out of your credibility. As well, having a very high debt to income ratio also makes you appear less credible. Focus on paying things on time, every time, and keep your debt load to a minimum. Remember: financing a new TV six months before applying for a mortgage may not the best idea. Instead, save an extra month or two and buy the TV in cash (leaving your credit unaffected).
Having good credit will keep your interest rates down. This is especially true when you are applying for mortgages, lines of credit, or credit cards. In the case of a mortgage, saving an extra 0.5% on your interest could mean tens of thousands of dollars in the long-term!
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