In today’s world of credit bureaus, shared personal information, and sliding scale mortgages, it is difficult to fully understand the factors contributing to your credit score- much less know how to improve it. This article covers what goes into a credit score, how to improve your score for free, and consumer rights provided by the Fair Credit Reporting Act and other consumer legislation. We hear a lot of misunderstanding and misinformation from clients surrounding credit scores and their impact on the home buying process. Fact is, an improperly structured mortgage or an inaccurate credit report could be costing you up to $5,000 a year or more in inflated payments. For prospective buyers, something as trivial as an inaccurately recorded missed payment or aging collection could be preventing a much-needed approval on a loan. Let’s start from the beginning: What is a credit score?
A credit score is simply a numeric value attributed to a person’s creditworthiness from a lender’s perspective. For-profit entities called ‘Credit Bureaus’ including Equifax, Experian, and Transunion pay companies for access to your personal banking and payment records to generate this score. Many factors go into creating a credit score including late or missed payments, balance outstanding on existing credit cards, and major derogatory items such as tax liens and bankruptcies. There are a few avenues to receiving a full disclosure of your credit report. Be wary of ‘free credit report’ sites that will only provide you with one bureau’s score- many of these sites are run by the bureaus themselves in order to generate additional revenue- we’re looking at you FreeCreditReport.com! FreeCreditReport.com and similar sites only provide consumers with a single bureau’s score and records, charging additional fees to allow access to Equifax and Experian scores. If you are denied credit or a loan for any reasons from any institution, you are entitled access to a report of what factors and why you were denied. Additionally, you are entitled to a full report from each bureau each year at no cost.This should include a full credit disclosure including your credit history, open accounts, and any derogatory accounts present such as collections.
Unfortunately in many cases, information present on your credit report may be inaccurate. According to numerous studies up to 80% of credit reports contain errors. These errors and omissions may originate from something as simple as a misspelled last name or as dire as undiscovered identity theft. Upon receiving a full three-bureau report of your credit, examine it closely for any errors. Verify that your payment histories are represented accurately, that each item on the report truly belongs to you, and that there are no inaccurate or fraudulent accounts present. Do you see something like a collection or inaccurate late payment? Don’t worry, you’re not alone.
Many consumers are simply unaware of their rights if there is an inaccurate or fraudulent account present on their report. These inaccuracies can prevent approval for their dream home or cost them thousands a year in inflated mortgage expenses. Collections agencies, lienholders, and credit bureaus all stand to gain from the presence of these derogatory accounts, as it increases the likelihood of payment of their debts and secures additional interest revenue. However, no report is set in stone and there is plenty of consumer legislation protecting you from such behavior. For instance, a debt or collection is only considered outstanding for up to four years after inception of the agreement. That $200 department store credit card you got in college and never got around to paying? It shouldn’t be on your report. Utility collections or liens from old landlords exceeding the four year statute of limitations shouldn’t be on there either. Even severe items such as a bankruptcy or civil judgment should not be present on your report after seven years. If you’ve found any of these out-dated accounts, here’s what to do:
Demand proof of your debt in writing. By law, credit reporting agencies and creditors are required to keep on file all documents associated with the inception of debt agreements. If the creditor is unable to produce sufficient evidence that you have signed and agreed to payment terms within the statute of limitations, the debt is deemed uncollectible and should be stricken from your report. Notify all creditors and credit bureaus (Experian, Equifax, and TransUnion) of this error and demand that they rectify it. Send your notices by certified mail as they are only given 30 days by the Federal government to comply. Things get even easier if the accounts are past their 4-year deadline. Simply notify the credit bureaus listed above that the accounts have past their collectible time period and demand them to be removed. Again, they only have 30 days from receipt of your request to comply. Many corporations will attempt stall tactics to prevent removing the accounts in question. Do not be deterred, they are simply trying to secure payment for uncollectible debts and will be forced to comply with your demands.
You may be lucky enough to have no derogatory accounts or inaccuracies on your report, but may still not be qualified for a mortgage in your price range. If this is the case for you, remember these tips for boosting your credit score: keep all balances on outstanding recurring credit such as credit cards to approximately 30% of available balance. This communicates to lenders that you have been offered credit but underutilize it due to your spending and payment history. Always make your payments one day early and at least one cent higher than the minimum payment. This goes a long way in preventing clerical errors and omissions. Also, do not apply for any additional credit while you are considering purchasing a home. Though an individual inquiry or two may not ruin your approval chances, excess applications and inquiries will show lenders that you are shopping for credit and are a good candidate for a higher interest rate. Lastly, when buying your home, be sure to make at least a 20% down payment. FHA and other loans prefer larger down payments as an exhibition of intent and ability to pay a large balance. Also, the mortgage rates you will qualify for will be much lower than if you made a 5% or 10% down payment.
As daunting as the world of credit reports, bureaus, and creditors may be, you are protected under the law. Don’t let inaccurate or derogatory information on your report prevent you from making the purchase of your dreams. Lastly, if you are having trouble removing derogatory information from your credit report, be wary of companies guaranteeing expedient removal of these items. Credit repair companies are notorious for non-delivery and may even muck up any chances you have of dealing with the accounts in a timely manner. Don’t let anyone stand in the way of you buying the home of your dreams!
Written by Gregory Lyons in Association with Harris Team Real Estate