Learn how your credit can affect loan prospects
Step 1: Get a copy of your credit report
Errors in credit reports are often difficult and time-consuming to correct, even when they’re not your fault. That’s why it’s wise to review your credit report every year as well as several months before you begin shopping for a house or a mortgage.
Your credit reports are maintained by three different companies, often called credit “repositories” or “bureaus,” which collect and store information supplied by the department stores, credit card companies and others with whom you have accounts. Not all creditors report to all three repositories, though, so each of your credit reports could be different.
Under the Fair Credit Reporting Act, you are entitled to a free credit reports if you have been denied credit within the previous 60 days or are a resident of Colorado, Georgia, Massachusetts, Maryland, New Jersey and Vermont. Simply follow the instructions in your rejection notice. Otherwise, you can obtain your credit reports from each of the three companies for a fee of $8.50 or less.
The three major agencies to contact for your credit reports are:
- Equifax Credit Information Services
PO Box 740256
Atlanta, GA 30374-0256
800-685-1111
http://www.equifax.com
- Experian National Consumer Assistance Center
PO Box 949
Allen, TX 75013-0949
800-682-7654
http://www.experian.com
- Trans Union National Disclosure Center
PO Box 390
Springfield, PA 19064
800-888-4213
What to do
To obtain your credit report, call, write or e-mail each company. Your request must include the following information:
- Your full and complete name, including such appellations as Jr., Sr. and III.
- Your current address.
- Your previous addresses, if any, for the past two years.
- Your Social Security Number.
- Your date-of-birth.
- Your phone number.
Step 2: Review your credit report
Credit reports are often difficult to decipher, so you might want to ask your real estate agent or loan officer to go over yours with you. Local non-profit organizations also provide this service at no cost, as do credit-counseling agencies.
Typically, your record will show the date you opened an account or took out a loan, your credit limits or loan amounts, current balances and monthly payments. It will also show late payments, missed payments, accounts that have been turned over to collection agencies and repossessions, all taken from information provided by the companies with which you do business.
In addition, the report will contain data from public records, including bankruptcies, foreclosures, tax liens, monetary court judgments and, in some places, even overdue child-support payments. The report will also list the names of those companies that have obtained a copy of your credit report and how often you have applied for credit over the last two years.
What to look for: For starters, make sure the information in your report is up-to-date. Many companies don’t report to the three credit bureaus as frequently as they should. So if you’ve recently straightened out a beef with a creditor, it may not have been reported yet. Also, some companies only report when you’re late and don’t bother reporting that you pay on time. You want to make sure your record reflects the good as well as the not-so-good.
Next, scour your report for information that is old and out-of-date and no longer reflects how you use credit. By law, for example, bankruptcies are supposed to be expunged from your records after 10 years. More important, though, the more recent the problem, the more significant it is to the lender. Thus, a 30-day payment that was late three years ago isn’t as important as one that was late three months ago. Lenders are more concerned with how you are dealing with credit now as opposed to how you handled it in the past.
Now hunt for mistakes. You may be surprised by how many factual errors you find. For instance, your adult child’s credit problems may be reported as yours, especially if he is a “Jr.” Or the difficulties of someone who’s totally unrelated to you but has a similar name may be in your file as well.
Also look for misdated account closings, particularly when you have had to ask repeatedly to terminate your account. Often, when companies are notified that they have failed to close accounts as previously requested, they close the account on the date of the most recent request instead of the original one. And that can lead to problems because recent account closures are often taken as a sign of financial difficulties.
What is your credit score?To speed the process and cut costs, lenders are relying heavily on automation to underwrite their loans. And to help them judge your credit, they use statistical modeling to come up with a credit score, which is nothing more than a computer-generated number based on the data in your credit file.
The score takes into account the same things human underwriters do:
- The number and frequency of late payments
- The number of credit cards you have
- Whether you consistently live at your credit limits
- Whether you have savings
- The frequency with which inquiries are made about your credit
But the computer is much faster because it can make recommendations in a matter of minutes. And because it is blind to your race, religion, gender, national origin, marital status and income, it’s more objective, too. Furthermore, applicants who don’t score high enough with the computer aren’t rejected. Rather, they are referred to a human who may be able to take “compensating factors” into account.
It’s also important to note that besides your credit score, automated underwriting looks at several other factors that have a bearing on your loan application. These include:
- Whether you are buying or refinancing
- Whether occupancy is full or part-time
- The amount you have for a downpayment
- The type of loan and its duration
- The type of property
- Your employment
- How much money you will have in reserve after you close the loan
*This article was originally printed on Realtor.com
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