Before you refinance make sure your credit history is good. The history of your handling of your credit repayments like those against your credit cards, loans, mortgages, is called your credit history.
Credit score is the number that reflects your overall financial condition and worthiness of taking up more credit. Credit score is generated by the credit reporting agencies who monitor all your payments against your credits. A good credit score means you have a good credit history.
There are three organizations – Experian, TransUnion and Equifax, that monitor all you credit transactions and loans.
All lenders, from whom you can refinance your home mortgage, first check your credit history before approving your mortgage. If you have a good credit score, the lenders can readily approve your mortgage and also give you a low interest rate because the credit report kind of tells them that you are a responsible borrower and chances of you defaulting on any of your payments are very low. On the other hand, a bad credit score, that can be caused by many factors as described below, raises a red flag to the lenders and they may either deny your mortgage or put extra conditions and give you a higher interest rate. A bad credit score shows that you are more likely to default on your payments and the lender’s money might be at risk.
A good credit score is 760 and above.
Factors that improve the credit score
1. Having a good cushion of available credit between your current balance and and your credit limit, shows the lenders that you are unlikely to overextend yourself financially.
2. Having a relatively loe credit balance compared to your total available credit limits on your credit cards impacts your credit score positively.
3. Having a high credit limit on your credit cards tells your lenders that you have enough financial experience which affects your credit score positively and helps to get you a good interest rate on your loans.
4. If you have at least 2 major credit cards like MasterCard, Visa, American Express and Discover, it helps your credit score. This tell the lenders that you are a responsible borrower and they would be more likely to extend you credit.
5. Making all payments on time against your credit undertakings like credit cards, mortgage, car and student loans is vital in building up a good credit history.
Factors that can lower your credit score
1. Defaulting or making late payments on your credit cards or mortgages or loans is a major factor that affects the credit score negatively.
2. each time a potential lender or landlord pulls your credit report for review, an inquiry is placed on your file. Inquiries stay on your credit report for up to two years. Having several inquiries on the credit report negatively affects the credit report. These are not necessarily negative information, but too many inquiries may indicate to lenders that you are trying to take on more new debt or possibly over extending yourself.
3. If any of your payments is sent to the collection agency, it might get reported to the credit reporting services.
4. Declaration of bankruptcy can affect your credit history for up to 10 years.
5. Unpaid tax liens negatively impact your credit history for up to 15 years.
