How Should I Handle My Credit to Prepare for the Future?

 When you apply for credit, the lender will undoubtedly check your credit report. The information in your credit history helps lenders decide how much credit you are eligible for, and at what interest rate. The better your credit history, the more likely you are to qualify for the best credit deals.

But what will they be examining? Here are a few key factors: 

• Pay your bills on time. Creditors always look for indications that the prospective borrower is a good credit risk: a person who will pay back his or her debts in a timely fashion. No payments of any kind should be more than 60 days late, and there should be no outstanding public record debts such as judgments or liens.

• Keep your debt load reasonable. One factor any creditor must assess before offering credit is the total debt of the person applying. As a rule of thumb, financial experts say non-mortgage debt payments should not exceed 10-15% of your take home pay each month.  If your debts are currently too high, consider ways to pay some down before you apply for new credit.

• Avoid unnecessary inquiries. Whenever you authorize a creditor to check your credit report, an "inquiry" is added to the report itself--a note that someone has checked your credit. (Checking your own credit report, however, does not influence your credit rating.) An inquiry usually stays on your credit report for two years. Too many inquiries may indicate you are applying for lots of credit because of financial difficulty, or are overextending yourself by taking on more debt than you can actually repay.

If you're shopping around for mortgages, for example, don't let every lender you consider run a credit check. Shop around to find the lender of your choice, and then authorize a credit check. 

• Eliminate excess unused credit. Just as a high number of inquiries suggests you may be overextending yourself, excessive available credit means you have the capability to overextend yourself in the future, even if you have not done so in the past. The lender needs to be reasonably sure you will continue to be able to repay your debt in the future. Simply close unused credit accounts before applying for a large loan, and/or consider having your credit limits reduced. Make sure the creditors record that the account was closed or changed at the consumer's request--you don't want anyone to get the impression the bank closed the account because of problems with your payment habits.

For peace of mind when applying for a loan, check your 3 Bureau Credit Report as reported by the three major credit bureaus—Experian, Equifax and Trans Union—in an easy-to-understand, consolidated format. Then approach your lender with the confidence of knowing what he or she will learn about your financial background.