Is purchasing a home one of your goals? First things first, retrieve your credit report and assess if there’s anything you can do to improve it before securing financing. The better your credit report, the better interest rate and terms for your mortgage, which can save you thousands in the long run. If you want to improve your credit score, you need to understand what matters the most on your report. Here’s a short guide so you can put your focus where it’s needed.
Least Important – Personal Information
Your credit report will list your date of birth, past addresses, names you’ve legally taken (maiden, married, etc.), spouses, employers, and similar. This information should be reviewed just to make sure that no erroneous people and debts are being attributed to your social security number. This is listed as least important, because this rarely happens, and old data has no affect on your credit report.
Least Important – Requests for Your Credit History
It used to be taboo to view your own credit report because every request to review risked a deduction in your credit score. However, credit reporting agencies have become much more reasonable in the past 10 years. Soft inquiries no longer affect your report. These include you viewing your report via services like CreditKarma and AnnualCreditReport.com, credit agencies generating reports for you, potential employers who want to extend an offer of employment, existing creditors monitoring your credit history, and other creditors who want to send you offers.
A hard inquiry happens when you apply for a loan, credit card, insurance, housing, etc. A hard credit inquiry also happens when you request a credit line increase or when an account is transferred to a credit agency. A hard inquiry won’t have a significant impact on your credit report if it’s an isolated request. If there’s multiple inquiries within a short period of time, especially when you have negative marks on your report, these can cause a significant drop in score. Multiple inquiries from auto, mortgage, or student loan lenders in a short period of time are counted as one pull because consumers usually shop around for the best rates and loan packages, and a credit report is required for an accurate offer.
Important – On-time Payments
One of the most important things your credit report should do is demonstrate that you are able to make payments on time. No payments should be more than 30 days late. Now, if there was a month where you completely spaced and forgot to make a payment on an account you’ve had for a while, don’t worry about it too much. Your history shows that you are usually consistent in your payments.
On the other hand, if you have multiple late payments and accounts in bad standing, companies are likely to turn you down for new lines of credit. Unfortunately, there’s no quick solution to improving your account history. Late payments can stay on your credit report up to 7 years. However, the more on-time payments you make, the more your score will go up. Late payments from 5 years ago carry less weight that those missed in the past year.
Important – Account Balances
In addition to on-time payments, lenders and other companies look at how you use your credit lines, and I don’t mean what you purchased. They want to know if you’re always at your max amount and making minimum payments, or if you keep your credit lines relatively low. The former is most likely to count against you. So pay down those balances but don’t quit using them entirely.
Really Important – Inaccurate Information
It’s vital that you monitor your credit report even when you aren’t preparing to make a large investment, like buying a home. Companies are not 100% reliable in their reporting and inaccuracies can pop up in your credit history. These can be very damaging to your credit report.
To have inaccuracies removed, you’ll need to first determine who to contact. If it’s a late payment, incorrect payoff, wrong balance, etc., you should first try contacting the furnisher of the information (the bank/company) before contacting any of the credit bureaus. The role of a bureau is to investigate the claims, which can take a few months. Meanwhile, the furnisher could update the information in their database and in-turn update your report within weeks. If they refuse to correct the information, you can file a dispute with each of the 3 national credit bureaus (Equifax, TransUnion and Experian,) and provide proof to support your claim. If the inaccuracy is in the personal information, you should contact the credit bureaus directly, because they are the ones with control over that data. Learn more about addressing inaccurate information on CreditKarma).
Really Important – Bankruptcies and Foreclosures
Sometimes the biggest influence on your credit report is the data you can’t improve. If you have a bankruptcy or foreclosure in your past, all you can do is wait for it to be removed. Bankruptcies stay on your credit report for 7 years (Chapter 13) to 10 years (Chapter 7), and foreclosures stay on your report for 7 years. If it’s been longer than the years stated and the bankruptcy or foreclosure is still lingering on your report, you can contact the bureaus to have them remove it. You’ll just need to provide the court documents that show it’s been completed.
In the meantime, continue to make all your payments on time. You may not be able to qualify for a new loan or other line of credit, but you’ll want to have a good history for when that bankruptcy or foreclosure is removed. As soon as you’re in the clear, you’ll want to start taking the steps to rebuild your credit score, which can include applying for a prepaid credit card.
Ready to Apply for a Mortgage?
If you’re ready to apply for a mortgage and purchase a home in the greater Wilmington area, give us a call! We’re happy to pass along the contact information for reputable local lenders. Just give us a call or send us a message through our contact page.
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