Having a good credit record means, among other things, that you pay your rent and other bills on time. Having less than perfect credit, however, doesn't mean you can't get a mortgage loan.

Whether your credit is perfect or not, you should know some terms about credit before you meet with your  lender.

• Credit bureaus compile a record of your debts and how you have repaid them. They gather their information from credit card companies, banks, department stores, and other firms. This information makes up your credit report.
• Your credit history shows how well you have paid your debts in the past.
• Capacity is your financial means for repaying your debt.
• Capital indicates whether you have enough money for a down payment and closing costs.
• Collateral serves to protect the lender if you fail to repay the loan.

As part of the mortgage loan process, your lender will request a credit report, so it's advisable to review a copy before you meet with your lender in case there are errors. If there are discrepancies or errors in your credit report, you should contact the credit bureau to correct them.

Your credit rating is based on the information in your credit report. This information is converted into a number -- a credit score -- that the lender uses to determine whether you are likely to repay your loan in a timely manner.

The scores used in mortgage lending are typically in the 300 to 900 range. A general guide is that the higher your score the better. But you should keep in mind that your credit score is just one of several factors that will be used to evaluate your mortgage loan application.

It is important to know that your credit score is based solely on information in your credit report. Factors such as race, age, religion, national origin, marital status, gender, income, where you live, and employment are not considered in determining your credit score.

Credit and Homeonwership

If you're thinking about buying a home, you should also be thinking about your credit. The first step in the homebuying process is understanding your credit.

When you apply for a mortgage, lenders will review your credit report. Your credit report is a history of how you've managed your finances: it's a record of money you've borrowed and your history of paying it back.

Your credit report is a record of all your credit transactions whenever and wherever you've used credit to purchase goods and services. Your credit will have a big influence on whether or not you can get a mortgage, the terms of that loan, and the interest rate. If you have good credit, you may have a much wider range of mortgage offers with lower rates.

So how do you better understand credit? 

Building good credit doesn't have to be difficult, but it does require time and patience. Follow these tips and you're on your way:

• Pay your bills on time.
• Credit scores emphasize your most recent payment record. Paying on time raises your credit score. If you've been late, start paying on time!
• Pay at least the minimum amount required.
• You can always pay more - and it's a good idea if you can afford it. But you should never pay less than the minimum.
• Keep your credit card balances low.
• Don't "max out" your credit cards - that can lower your credit score.
• Don't apply for too many loans or new accounts.
• Applying for a lot of credit in a short period of time may concern lenders that you won't manage your debt well. Only apply for credit when you need it.
• Keep your debt-to-income ratio at 20%.
• Generally, you should not have credit card or other installment debt that's more than 20% of your net monthly income.
• Establish credit if you don't have any.
• Open a free or low-cost checking or savings account and make regular deposits. Only write checks when you have money to pay for things. And apply for one or two credit cards, use them carefully, and pay them off each month.