Bad credit is a big factor in any lender's mortgage process. In fact, some lenders will not even consider someone who has bad credit. So, your credit history and credit score are critical to you getting a loan and getting a lower interest rate.

What's a credit score? The most common credit score is the FICO score. A FICO score of 620 or less indicates bad credit. What a FICO score or any other credit score do is rank you and your credit history against a scale. The higher your credit score, the better credit history you have overall.

Fundamentally, your credit score combined with your credit history help mortgage lenders decide how much credit to give you and what interest rate you qualify for. So, the better your credit history, and the higher your credit score, the more likely you are to qualify for the lowest interest rates and best mortgage options.

How did your credit get bad? Well, if you have never had credit it may be bad because you have no payment history. That's easy to fix. On the other hand, you may have a bad credit score because of your bad payment history. While this can also be fixed, it will take longer.

How did you end up with a bad payment history? It's actually pretty easy. Many organizations report to credit bureaus every time you miss a payment. So, if you've been late with your phone bill or electricity bill or gas bill it's likely on your record. Each time this happens, it will lower your credit score.

Who reports late payments? Any organization that is collecting payments can potentially report late payments. Some organizations don't report a late payment unless there is a 'history' of problem. But you cannot rely on that.

If you have bad credit, you need to understand exactly how bad it is. Your first step is to obtain a "tri-merged credit report", which will also contain your credit scores.

What the heck is a "tri-merged credit report"? A "tri-merged credit report" is a complete credit report, with as much history as has been reported on you. This information is kept by credit reporting agencies.

There are 3 main credit-reporting agencies used by the mortgage industry. They are Equifax, Trans Union and Experian. These credit agencies or bureaus will pull from their files a credit report for a lender when a credit check is requested. The tri-merged report is a compilation of the information received from all three agencies.