Paying close attention your credit is crucial to securing a home loan and a manageable mortgage rate. Though it can seem daunting, I encourage you to get a head start now by going over your credit report thoroughly. This will give you the time to correct any issues and then check up periodically to ensure the best possible score BEFORE you are ready for your big purchase.
What ‘cleaning your credit’ means
Cleaning up your credit report means getting rid of inaccurate or outdated information, and fixing anything that is not correct. It does not mean getting rid of delinquent accounts that are, in fact, delinquent. Or getting rid of anything else that has a legitimate right to be on your report. Many companies will claim to repair your credit quickly for a fee – be wary. You can resolve most inaccurate and old information yourself.
Get copies of your credit reports
You are entitled to one free copy from the three major credit reporting agencies – Equifax, TransUnion, and Experian – every 12 months. If you live in Colorado, Maine, Maryland, Massachusetts, New Jersey, Vermont or Georgia, you’re entitled to a second copy of each report annually.
You should order your report from all three, as they often contain different information. You can stagger the timing to keep a close eye on any changes.
Review your reports
Next, do a careful review of each of your reports – look for anything that is inaccurate or incomplete.
One common credit report error is the inclusion of old negative information that should have come off a consumer’s record. Most negative information stays on for seven years, and Chapter 7 bankruptcies remain for 10. A lot of times the information on your report doesn’t automatically fall off at that seven-year mark.
Make a List
Make a detailed list of everything that is wrong, inaccurate, outdated, or even information that is missing. Then, gather supporting documents. For example, if you closed an account that is still reported as open, see if you can obtain a letter or other document showing you closed the account.
Send a dispute letter to the CRA, detailing what is wrong and why, and including supporting document. You’ll have to send the letter directly to the CRA. Use the particular address the CRA sets forth for these dispute letters. You can find the contact information for the CRAs below.
Experian: www.experian.com: 1-888-397-3742
TransUnion: www.transunion.com: 1-800-916-8800
Equifax: www.equifax.com: 1-800-685-1111
Once you deal with any errors on your credit report, there are only three simple things to do to repair your credit:
- Pay all of your bills on time
- Pay down debt (especially credit card debt)
- Avoid applying for credit
Pay on time
On-time payments are the single most important factor to your credit score, and your credit won’t improve until you can consistently pay every bill on time.
If you’re behind on one or more monthly bills or you need help living within your means, you can turn to a credit counseling or debt management agency, or you may be able to find free counseling at your local library or another non-profit organization.
Pay down credit card balances
Take charge of your charge cards. If you have any outstanding balances, pay down these debts bit by bit, every month until they are at zero balance.
Know your credit limits and make every effort to stay well under the maximum when charging items. Debt is analyzed by ratios. If you charge $500 on a card which has a $1,500 limit, you’ve used 33%, which is better for your credit score than charging the same amount on a card which has a $1,000 limit (50%), both of which are better than being maxed out (100%). Pay these credit cards down and keep them open. The total amount of available credit affects your score, even if there is no balance.
Don’t apply for new credit
Each time you apply for credit is listed on your credit report as a hard inquiry and if you have too many within two years, your credit score will suffer.
Once you’ve fixed errors on your credit report, begun budgeting and paying off debts, be patient. It will take months or even a couple of years for your credit score to improve, but if you plan on buying a new home, it’s well worth the effort.
What are your financial resolutions for the new year?