Credit is a financial tool that enables you to purchase and own an item or property without paying for it all at once. Your ability to use credit responsibly and repay creditors on time directly affects how much access to credit you will have in the future. Building a solid credit history gives you more buying power when you need it, and that can be especially valuable when you are purchasing a home.

How credit affects your loan options

When you apply for a mortgage, the lender will evaluate your credit history to see how you have managed credit in the past, and then use this information to determine how likely you are to keep up with payments in the future. By predicting how well you will manage your debt, the mortgage company can measure the risk involved with lending you money.

Everything else being equal, someone who has consistently made payments on time is a lower credit risk than someone who has not. Because lenders usually offset risk with higher finance charges, including interest rate, having a better credit history generally means more favorable loan terms and can save you thousands in interest payments. And because some loan options are riskier than others, good credit may give you more flexibility in structuring your mortgage.

Buying a home when you've had credit challenges

Many people believe they can't purchase a home unless they have a perfect credit history. While it is certainly helpful, a flawless credit history is not a requirement in the home-buying process. In fact, homeownership can be a major tool in overcoming past credit difficulties.

Buying a home gives you the opportunity to improve your financial situation by:

• Establishing a strong payment record. Paying your mortgage on time every month goes a long way toward showing creditors that you can properly manage debt.
• Building wealth for your future. Each time you make your mortgage payment, not only do you improve your credit, you also build home equity that you can later leverage to reach your financial goals.

If you have less than perfect credit, my loan officers can direct you to a loan program that can help you on your way to becoming a homeowner.

Before lending you money, creditors - including mortgage lenders - need to determine how likely you are to repay the debt. One way is to examine your past use of credit, which is recorded on you credit report.

What goes on your credit report

Although each credit reporting agency may report information differently, all credit reports contain the following:

• Identity information. This includes name, address, date of birth, social security number, any aliases, and in some cases, place of employment.
• Credit accounts. You credit report lists information in each of your accounts, including the account type, date it was opened, credit limit, balance, and payment history.
• Inquiries. When a lender requests your credit report, either to process an application submitted or to pre-approve you, the inquiry is recorded. If you request your own report, however, these inquiries are not listed.
• Public Records. These include information about bankruptcies, foreclosures, and any other liens.

What your credit score means

Credit scoring translates the information on your credit report into a numeric score, which makes it easier for a lander to evaluate you credit. Scores generally range from 300 to 900, with a higher score indicating a greater likelihood that you will make payments on time.

What affects your credit score

Credit scores are developed by comparing credit reports from millions of consumers over time, and identifying factors that tend to predict how well people manages credit later. Those factors include:

• Payment history. Whether you've made your payments on time in the past is used to predict how likely you are to pay in the future.
• Outstanding balances. Being over-extended on your credit accounts tends to lower your score.
• Length of your credit history. Credit scores reflect payment patterns over time, so having a longer history gives lenders a more reliable picture of your credit.
• Types of credit in use. Having a diverse mix of account types usually has a positive affect on your score.
• New credit.  A series of requests for new credit may suggest to lenders that you are looking to take on new debt and may not be able to re-pay debts in the future. Because people tend to shop around for mortgages and other loans, all credit applications within a 14-day period are counted as a single request.

Credit scores are considered unbiased because they are based solely on your past credit history. Your score cannot be based on race, religion, sex, age, national origin, marital status, or income.

Whether you need to rebuild a damaged credit history, build a new credit history, or simply maintain your solid credit rating, here are some things you can do to help you achieve your goal:

Check your credit report for errors

Your first step is to make sure that your credit report is accurate. Balancing out a negative entry with consistent payments takes time and effort - getting rid of an incorrect entry is much easier and can make a huge difference in your credit score.

Here's how to check for and correct errors:

• Order a copy of your credit report from one or more of the three credit reporting bureaus.
• Review each account on your report to make sure it actually belongs to you, or did at one time.
• If an account that you no longer have is listed as open, contact the creditor and ask them to report it as closed. And, as it usually takes months for creditors to do this, send proof of the closed account to all credit reporting agencies and keep record of this.
• If an entry is inaccurate, ask the credit bureau to investigate. They should give you a response either verifying the account or deleting it from your credit report.

Change the way you think about credit

Having credit cards and loans that you pay regularly is a good thing in the eyes of lenders. At the same time, having too much available credit often brings the temptation to buy things you really can't afford. The key to good credit is managing it by finding a comfortable middle ground.

To guard against overspending, try to think of credit as a tool that gives you more financial freedom - not more stuff.

Consolidate your debt

If you are overextended with credit and you are living month-to-month, debt consolidation might be a great way to make your payments more manageable. By paying off multiple credit accounts using a refinance or a home equity loan, you can take advantage of three valuable benefits:

• Simplicity. Instead of a steady stream of bills in the mail - each with a different payment amount , due-date and interest rate - you receive a single statement each month.
• Lower payments. Because these debts are secured by your home, home loans generally carry lower rates than most types of credit cards. This means you'll have lower monthly payments and a chance to put money in savings.
• Tax Savings. Unlike credit cards and installment loans, interest on home loans is usually tax deductible. And because monthly payments at the beginning of the loan term are mostly interest, you could enjoy substantial tax savings early on. Be sure to ask your tax advisor about the deductibility of your mortgage interest.