There are several things that affect your credit but one of the main factors to having credit and maintaining a healthy score is understanding debt. Buying a home is a big step and getting a home loan sometimes seems intimidating. There have been times that I have had clients that were reluctant to apply for a home loan thinking that they would not qualify. When in reality they did.
The two basic forms of debt are installment and revolving and having too much of one can hurt you more than the other. An installment loan is a loan based on repaying the loan with payments over a certain amount of time. An example of this is a car loan, 3 or 5 years and fixed payments during that time. Your payments include both principal, which is the amount of money you borrowed, and the interest, which is the additional amount you pay for the privilege of borrowing the money. This is the form of debt that is more predictable for the lender in regards to knowing exactly what the borrower owes and what the payments are going to be. In fact if you have less than 6 months left on your loan most lenders won’t even count that debt against you.
A revolving line of credit, for example a credit card, may have a minimum payment based on the lender’s policies that may not even cover the interest you owe. I have seen some cards where the minimum payment did not even cover the expenses for the interest so the balance owed was actually growing. The outstanding principal which unlike the installment loan can literally last forever when you only make the minimum payments which never really pays down the principal, on the money you owe. Keep in mind that if all you do is make the minimum payments that it will register with the credit bureaus as well and keep you from getting a higher score. The better your credit score the better the loan terms can be for you when getting a home loan. this does not mean you are guaranteed a home loan just means that you have better chances of qualifying with good scores. Lenders feel more confident that you will be able to pay them back.
It is not exactly true that you need to have good credit to buy a home, you don’t need perfect credit either just relatively decent credit. There are other programs available for people who have less than perfect credit. You must understand however that these programs consist of higher interest rates. Reality is you cannot expect to get the same interest rate on a home loan as someone that may have perfect credit if you have issues with your credit.
Another thing with revolving credit is that if you have too many cards even if they have no balances. The reasoning behind why it can affect your credit is because at any moment you can choose to run those cards up when ever you want. Which puts you at a higher risk for lending money. Keep a few cards for emergencies and those incidentals that pop up here and there. Stay away from the department store credit cards to save that 10% off your purchase price it will cost you a lot more in interest when all is said and done. Reality is, you can use a Visa at all those stores try to limit your credit cards to 4. Any more than that you really have to ask yourself why do I need all those cards?
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