When you apply for a mortgage, one of the most important factors that lenders consider is your credit history. Your credit score and payment history can determine whether or not you are approved for a loan, and can also affect the interest rate you receive.
What is Credit History?
Credit history refers to a record of your borrowing and repayment activities. It includes information about your credit accounts, such as credit cards, loans, and mortgages, as well as your payment history, credit utilization, and other factors.
Your credit history is used to create a credit report, which is a summary of your creditworthiness. This report is used by lenders and other financial institutions to determine your credit risk.
Credit Score
Your credit score is a number that represents your creditworthiness. It is based on your credit history and is used by lenders to determine your eligibility for loans and credit cards.
The most commonly used credit score is the FICO score, which ranges from 300 to 850. The higher your score, the better your credit history and the more likely you are to be approved for a loan with favorable terms.
Why Lenders Look at Credit History
Lenders look at credit history because it helps them assess the risk of lending money to you. If you have a history of making payments on time and managing your credit responsibly, you are considered a lower risk borrower.
On the other hand, if you have a history of missed payments, late payments, or high credit utilization, you are considered a higher risk borrower. This means that lenders may be less likely to approve you for a loan or may offer you less favorable terms.
What Lenders Look for in Credit History
When lenders look at your credit history, they are looking for several factors:
- Payment history: Lenders want to see that you have a history of making payments on time and in full.
- Credit utilization: Lenders want to see that you are not using all of your available credit, as this can indicate that you are overextended financially.
- Length of credit history: Lenders want to see that you have a history of managing credit responsibly over a long period of time.
- Credit mix: Lenders want to see that you have a mix of credit accounts, such as credit cards, loans, and mortgages.
Improving Your Credit History
If you have a poor credit history, there are steps you can take to improve it. These include:
- Pay your bills on time: Late payments can have a negative impact on your credit score.
- Reduce your credit utilization: Try to keep your credit utilization below 30% of your available credit.
- Check your credit report: Make sure there are no errors or fraudulent accounts on your credit report.
- Open new credit accounts: Having a mix of credit accounts can improve your credit score over time.
Conclusion
Your credit history is an important factor that mortgage lenders consider when deciding whether to approve you for a loan. By understanding what lenders look for in credit history and taking steps to improve your credit score, you can increase your chances of being approved for a mortgage with favorable terms.