Buyer’s Tip: If you are thinking of buying a home in the next few months or in the upcoming year, there are several key proactive steps to take now regarding your credit health, since credit scores are a very important factor in determining what terms a you would receive on a mortgage loan.
(1.) Obtain a copy of your credit report to see if there are any errors you didn’t know about – these can take a few months to clear up. The three major credit bureaus are Experian, Equifax and TransUnion, and each provide different scores due to slightly different information they have on each individual (since they sort of compete for the information). Hopefully, the scores are similar or grouped closely to each other. For example, scores of 650, 660 and 640 are similar and would indicate no major discrepancies. However, scores of 650, 660 and 570 would indicate that the credit bureau reporting the 570 score has incorrect information that needs to be corrected, since this low score could lower the consumer’s average credit score. It could also be the one used by an automobile dealer or other creditor, and can dramatically effect the buyer’s loan terms.
If you do find errors contained in the credit file, then immediately challenge the incorrect information in writing by filling out a dispute form located on the back of the credit report. This written challenge or dispute should be sent via fax or e-mail directly to the credit bureau, with a request for a receipt that they have received the written challenge. Once the credit bureau has received the written challenge, they must notify the retailer of the challenge. Once notified,the retailer has 30 days to respond in writing. If they fail to respond within the 30 day time limit, the consumer is to be given the benefit of any doubt. Once the error has been corrected, the credit score would reflect the correction. The fallacy with this system is it often takes 30-45 days to get a problem corrected and reflected in the credit score.
(2.) Do not make inquiries for additional credit such as department stores, automobile dealers, furniture, jewerly stores, or apply for additional credit cards. This is a straightforward step, but easy to overlook, especially during the upcoming holiday shopping season. You do not want a lot of recent inquiries on your credit reports as they lower your credit score. Each inquiry can lower your score 3-5points. It is OK to shop lenders, as long as they are similar entries within a 30-day period, they are to be treated as only one inquiry. (This category is 10% of your credit score.)
Note that your credit score does not go down when you check your own credit or a bank does a credit scan on you, to determine if they want to offer you a credit card or other loans.
(3.) Never go to consumer counseling services when you are applying for home mortgage loans or if you wish to have a good credit score. This action alerts the credit bureaus that you are unable to pay your bills and may have an effect on your credit score much like a bankruptcy would.
(4.) To obtain good credit scores, one must have a lengthy credit history. This explains why older people generally have higher credit scores than younger people. It is important for young people to establish credit as soon as possible and commit to paying timely. All they have to do is to obtain good credit scores is pay the minimum payment as agreed. Credit bureaus are now accepting alternative credit information, such as letters from landlords, telephone companies, power companies and others, so that people who have few credit histories on their credit report can begin building good credit scores. (This category represents 15% of the credit score.)
(5.) Pay off as many outstanding balances owed on credit cards and other month-to-month obligations as possible and cease using your credit cards until after loan closing. This lowers your debt ratio and lowers the percentage of available credit used. The lower the percentage of available credit used, the better the score. It is a fact that people that are over-extended on their debts do not pay as timely as those who are not overextended. Make sure that your balances do not exceed 30% of your available credit line, as your credit score will be lowered. If your balance exceeds 75% of your available line of credit, your credit score will decline substantially. (This category represents 30% of your credit score.)
More helpful tips to come – Look for Part II of Credit Health Tips in the next post.