If you have ever taken out a loan to buy something—a car, for example—you were given credit. Credit means you are using someone else’s money to pay for things. It also means you are making a promise to repay the money (the loan) to the person or company that loaned you the money (the creditor or lender).
A loan usually includes both principal (the amount of money you borrowed) and interest (the additional dollars you pay for the privilege of borrowing the money). Because a loan is a legal obligation, it is important to understand how you must repay it.

Good credit means that you make your loan payments on time and you repay your debts as promised. Good credit is important because it makes it more likely that you can get a new loan in the future when you want to make a major purchase, such as a car or a home. When you have a good credit record, lenders feel more confident that you will be willing and able to pay back the new loan.

It’s true that you need good credit to buy a home, but you don’t need perfect credit. If you don’t have good credit right now, don’t get discouraged. You can use the ideas in this guide to start improving your credit.
It may take some time, but you will be far better off if you improve your credit before you apply for a home mortgage loan or other large purchase. This is important because if you have a habit of not paying your bills on time, or have a lot of debt, you may not qualify for a mortgage loan. Or the lender may give you a loan, but with a larger down payment requirement or at a higher rate of interest. If you pay a higher rate, you could end up paying thousands of dollars more in interest for your home.

A credit report is a record of how you have paid your credit card debt and other loans. A credit report shows how much debt you have, if you have made payments on time, or if you have not paid back some loans at all. Credit reports do not show information about your race, religion, medical history, personal lifestyle, political preferences, criminal record or any other information unrelated to credit.

Credit reports are compiled by national credit-reporting agencies. The typical credit report includes four types of information:

1. Identifying information: your name, current and previous addresses, telephone number, Social Security number, date of birth, and current and previous employers. This information comes from your credit applications.

2. Credit information: specific details about your credit cards, student loans, and other loans. This information includes the date opened, credit limit or loan amount, balance, and monthly payment. The report also shows your payment history during the past several years, and the names of anyone else responsible for paying the account, such as a spouse or a co-signer. Late payments, skipped payments, accounts turned over to a collection agency, and repossessions appear here. This information comes from companies you do business with.

3. Public record information: bankruptcy records, foreclosures, tax liens for unpaid taxes, monetary court
judgments (such as lawsuits), and, in some states, overdue child support. This information comes from public records.

4. Inquiries: the names of those who obtained a copy of your credit report and how often you have applied for credit in the past two years. When you order a credit report, you may also see the names of companies that have reviewed your report for “pre-approved” credit offers. However, these names will not be given to creditors who request a copy of your report. Creditors only see the inquiries you initiate (by applying for a new credit card, for example).

Creditors rely on this information about how you’ve handled your loans in the past to decide how likely you are to repay a new loan. When you apply for credit or a loan, you give the creditor permission to order your credit report from a credit-reporting agency.

The best way to know what your credit report shows is to order one and review it carefully. It’s a good idea to order your credit report once a year to make sure there are no errors on it. You can order your credit report from any of the major creditreporting agencies listed to the right. When you order your report, have ready your Social Security number, date of birth, current and previous addresses for the past five years, and maiden name, if applicable.

You can view the entire guide by going to: http://www.homebuyingguide.com