By Dian Hymer
Credit cards can be destructive in the hands of consumers who have little or no concept of a budget, who live beyond their means, who charge to the hilt, and then fall behind on their payments. This is preciously the kind of borrower that mortgage lenders try to avoid.
You'd think that consumers with no credit cards at all would be gold-plated in the lender's eye. Not so. Borrowers who haven't opened any credit lines can have a difficult time qualifying for a mortgage.
Lenders are interested in loaning to borrowers who have a good track record of managing their money well. From the lender's standpoint, a key measure of how well a prospective borrower manages his money is evidenced by a good history of borrowing money and paying it back on time.
Foreign nationals who are trying to buy a home in the U.S. are often caught in the "no credit history bind" when they attempt to qualify for a mortgage. Recently, a home buyer from France, who had only one credit card, had to provide the lender with copies of all his phone and utility bills for the past 12 months to substantiate that he was the sort of borrower who would pay his mortgage on time.
House Hunting Tip: If you don't have any credit cards and you're planning on buying a home soon, it's a good idea to establish 3 or 4 credit lines several months before you plan to buy. Use each credit card at least once, and then pay the balances off.
In addition to establishing credit, it's important that you safeguard the condition of your credit history. You earn brownie points for paying bills on time, but get dings for late or missed payments.
In recent years, it has become easier for lenders to analyze a borrower's creditworthiness by using credit scores. Your credit score is derived from a model that analyzes a number of variables to determine the likelihood that you'll repay your mortgage on time. Some of the variables considered are: outstanding debt (the number of balances reported by creditors and the average balances), credit history, delinquencies and late payments (both the frequency and severity) and types of credit in use (like credit cards and installment loans).
One of the most widely used credit scoring models is the Fair Isaac score. The Fair Isaac model analyzes about 100 variables from your credit files at the three national credit bureaus (Experian- www.experian.com; Trans Union Corporation-www.tuc.com; and Equifax-www.Equifax.com). Fair Isaac scores range from about 400 to 900. The higher the score, the better the credit risk. Some other credit scoring models work in the reverse fashion: the lower the score, the better the credit risk.
Your credit not only determines whether or not you qualify for a mortgage. It also affects the interest rate you'll pay. A credit score of 680 or more is usually required to qualify for the best available conforming rates that are quoted by mortgage brokers and lenders.
Borrowers with a credit score of 720 or more may qualify for a break on the interest rate or on the amount of the loan origination fee (called points). Borrowers with scores of 620 or less often have to pay a higher interest rate than the rate offered to borrowers with credit scores over 680.
The Closing: It's easy to order a copy of your credit report. Simply visit one of the major credit reporting agencies online. However, it's not a good idea to run random credit checks. Credit inquiries end up on your credit report, and they can have a negative impact on your credit score.
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