Poor Credit Results in Higher Interest and Lower Loan Amounts
Your credit history helps mortgage lenders decide how much credit you are eligible for and at what interest rate. The better your credit history, the more likely you are to qualify for the best mortgage programs. If you have poor or bad credit and are in the market for a mortgage or home loan, you may want to take steps to improve your credit before applying for a mortgage loan. Here is how:
Step 1: Get a copy of your credit report
The Fair & Accurate Credit Transaction (FACT) Act entitles consumers to an annual credit report for free Consumers can acquire their free report in three different ways:
1) Online: at www.annualcreditreport.com
2) By Phone: Call toll-free 877-322-8228
3) By Mail: Send a written request to:
Annual Credit Report Request Service
P. O. Box 105281
Atlanta, GA 30348-5281
You can also acquire your report from any number of credit reporting services that specialize in providing credit reports to consumers like www.creditkarma.com or www.privacyguard.com. You may pay a small fee but you’ll get a merged report that will be easier to understand and a phone number to call if you need assistance from a counselor.
Step 2: Study your report.
Look at your personal credit report closely. Check the accuracy of:
Personal data – Name, address, Social Security number
Employment – Current employer and address, and previous employers
Public Records – Judgments, liens, and bankruptcy
Account info – Open dates, balances, payments, date of late payments.
Charge-offs – Who is the creditor, what is the balance owed, is it true?
Step 3: Deal with charge-offs and inaccuracies – Contact the creditor
If you have reason to believe bogus or inaccurate information appears on your credit report. YOU HAVE THE RIGHT under the Fair Credit Reporting Act to dispute inaccurate information that might harm your credit rating.
DON’T FILE ANY DISPUTES YET! Think about this: If you dispute an inaccuracy with the repositories, they are going to contact the creditor who is going to confirm you still owe the money or that the late payment information is accurate. This only makes matters worse.
First, contact any creditors reporting any charge-offs. Come to an agreement with the creditor on how the matter can be resolved or get something in writing confirming the obligation has been satisfied.
Once the creditor is made aware of an inaccuracy, they should agree to update the repositories themselves. If the inaccuracies have a significant effect on your credit rating, we suggest following up by filing a dispute with the credit repositories yourself.
Step 4: Dispute Inaccuracies
We recommend you dispute inaccuracies online directly with the repositories (TransUnion, Experian, and Equifax;) or the credit reporting service you acquired your personal credit report from. You’ll be able to check the status of your dispute investigation online and you will be notified by e-mail when the results of your dispute are ready to be viewed.
How long does it take?
After you file a dispute, the credit repositories will investigate your claim by contacting the creditors by phone or through any number of automated systems. Often the matter is resolved in a few days but the creditor does have up to 30 days to respond. (Remember, if you filed the dispute online, you can check the status online anytime during the process.) Getting your credit report to reflect accurately your credit information will often require more than one try.
Tips for Maintaining or Improving Your Credit
Manage your credit for the LONG RUN. In the long run, your score will be determined by time and good financial behavior which include the following:
- Pay your bills on time. Late payments and collections can have a serious impact on your credit score.
- Balance vs. available credit: Your credit score is partially a function of the difference between your available credit and what you owe. If you are “maxed” out on your credit cards, your score will be low. Try to keep your credit card balances below 50% of the available limit. Example: It’s better to have two credit cards with $10,000 limits where you owe $5,000 on each card than to have one credit card with a $10,000 limit that is maxed out.
- Length of credit history – Don’t close any old accounts. Your credit score tracks the length of your credit history. A longer credit history helps your credit score. Closing older accounts can make your credit history look younger than it actually is, which can hurt your score.
- Do not apply for credit frequently. A lot of inquiries will give the appearance you may be taking on more debt that you can afford. Each inquiry can cause up to a 5 point drop in your credit score. The actual amount of damage depends on the number of inquiries, time period and other factors in your credit file. But on the bright side, once the new account is opened, the damage is done and there is no reason to close the account.
- Avoid over-consolidating. If you consolidate your credit card balances onto one low rate card and the balance on that card goes over 50% of the high credit limit, your credit score will go down. Building a good credit history over time – by paying bills promptly, establishing a variety of accounts, and keeping balances below 40% of your credit limit – is the best strategy for having and maintaining excellent credit.
- Shopping for debt consolidation financing: Be careful – multiple credit inquiries can hurt your credit score unless they occur in a short period of time. Do your homework within a short period of time. The scoring models treat multiple inquiries within a 14-day period as just one inquiry. They ignore all inquiries made within 30 days prior to the day the score was computed.
- Credit counseling agencies (aka “Consumer Credit Counseling” )
Enrolling with a “Consumer Credit Counseling” service is not supposed to hurt your credit score, but sometimes it does. This is because your current lenders may report you as late, because you’re not paying what you originally owed. Also, your credit counselor may not send in your payments on time which will hurt your credit (this stuff really happens.)
Being enrolled in credit counseling can affect your ability to secure mortgage financing and the interest rate you pay. Some lenders find credit counseling disturbing and will treat its enrollees the same as if they had filed for a Chapter 13 bankruptcy. Chapter 13 requires a repayment plan and might be looked at more favorably than a Chapter 7 which erases your debts.
If you are planning the purchase of a home and will need financing, it’s probably smart to avoid credit counseling. If you are already in financial trouble, credit counseling might get you back on track – just don’t expect miracles.
- Credit Repair Clinic
According to Experian, going to a credit repair clinic will not be of help to you. There is nothing a credit repair clinic can legally do for you – including removing inaccurate credit information – that you can’t do for yourself for free and their fees can be substantial, ranging from hundreds to thousands of dollars.
The Credit Repair Organization Act is a federal law that prohibits credit repair clinics from taking a consumer’s money until they have fully completed the services they promised. It also requires such firms to provide consumers with a written contract stating all the services to be provided and the terms and conditions of payment. Consumers also have three days to withdraw from the contract.
If you need more specific tips to improve your credit, please contact Charley at (603) 471-9300 or email Charley.