Not Reviewing Your Credit History

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Many times home buyers wait until they have a property under contract or until they apply for a mortgage to have their credit reports pulled.  If any errors or problems arise, sometimes great delays and heartaches result.

It can take 4 to 6 months sometimes to get inaccurate information removed from your credit reports and even longer to get your credit scores (the importance of credit scores is discussed below) to readjust and increase to where you can qualify for a mortgage.  In the meantime the seller probably isn't going to wait, you may have already spent money on inspections, and you are back to square one.

Getting a copy of your credit reports and credit scores early in the process is an absolute must. The term credit score usually refers to your FICO score, a number based on a formula developed by the Fair Isaac Corporation, which looks at a summary of all your credit accounts and payment history.

Your FICO (credit) score determines your access to and cost of credit. Most lenders use it as the main basis for loan or credit approvals, so the higher the better and the lower the more problems. FICO score ranges from 300-850, and Fair Isaac calculates them for each of the three big credit-reporting agencies: Trans Union, Equifax, and Experian.  For more information go to: myfico.com

Here's how your score is determined:

• 35% is determined by your payment history. Do you regularly pay your bills on time to any creditor that submits your information to the credit bureau? Overdue medical bills, utility bills and other bills may appear here.
• 30% is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you or the total loan amount you took out (debt to equity ratio). If you're maxing out your credit cards, your score may suffer.  It appears that the ideal is keep your balances below 30% of your maximum credit line.
• 5% is based on the length of your credit history, both how long you've had each account and how long it's been since you had any activity on those accounts. The fewer and older the accounts, the better (assuming you've made timely payments).
• 10% is based on how many accounts you've recently opened compared with the total number of your accounts, as well as the number of recent inquiries on your report made by lenders to whom you've applied for credit. Your score can drop if it looks as if you're seeking several new sources of credit, a sign that you may be in financial trouble. (If a lender initiates an inquiry about your credit report without your knowledge, though, it should not affect your score.)
  
  Shopping around for an auto loan or mortgage shouldn't hurt, if you keep your search to six weeks or less. But every inquiry you trigger when you apply for a credit card can affect your score. So be selective.
• 10% - The types of credit used determine the final 10%. Having installment debt like a mortgage, in which you pay a fixed amount each month, demonstrates that you can manage a large loan. But how you handle revolving debt, like credit cards, tends to carry more weight since it's seen as more predictive of future behavior. (You can pay off the balance each month or just the minimum, for example, charge to the limit of your cards or rarely use them)

What's not in your FICO credit score: Contrary to popular belief, your age, and employment history and where you live are not used in determining your credit score. This is not to say lenders when evaluating you for a loan won't consider this information, it's just that it will not factor into your FICO score calculation.

Why do mortgage lenders pay so much attention to these scores? Statistics indicate that there is a 1 in 8 chance that a borrower with a FICO score below 600 will be either severely delinquent or in default of their loan. While there is a 1 in 1,300 chance that a borrower with a score above 800 will have similar problems. It is therefore easy to see that lenders will put a lot of reliance on such credit evaluation systems.

So what can you do to get and keep a higher score? First, never have any late payments.  Second, don’t have a sudden surge of credit activity and credit inquiries. Third, don’t “tap out” your credit usage. Using more than 30% of a credit line seems to negatively impact a credit score.

Most mortgage companies will obtain your credit reports and credit scores, with information merged from all three credit reporting agencies, at no cost to you as part of a mortgage pre-qualification. This certainly is a quick, easy and less expensive means by which to check out your credit than to buy your credit report and credit score from each credit agency.

A federal law (The Fair and Accurate Credit Transactions Act of 2003 - the FACT Act) has gone into effect whereby the credit reporting agencies must provide you with one free report per 12 months. The official web site is www.annualcreditreport.com. The free report, however, doesn’t include your credit score. They will still charge extra for your credit score. Additional information can be found on the Federal Trade Commission’s web site. You also may be entitled to a free credit report under state law. Massachusett’s law requires free credit reports be available to consumers.

Caution: the credit scores offered by the credit repositories are called consumer scores and are not the same that a lender receives.  If you are applying for a car loan that score is different than the score if you are applying for a mortgage loan, which are different from the consumer score.  Each uses a different scoring method to obtain the three digit score.  The closest score is the FICO score through Equifax.  If you obtain your free credit reports from www.annualcreditreport.com, when you get to Equifax, also ask for the FICO score.  It will cost you $7.95 to do so, but it will give you a better idea of where you stand.

The three Credit Repositories and their contact information are:

• EQUIFAX - www.equifax.com  800-685-1111
• EXPERIAN (Formerly TRW) - www.experian.com  888-397-3742
• TRANSUNION - www.transunion.com  800-888-4213

Mortgage lenders pull credit information from all three credit reporting agencies as part of a mortgage application. You should also. Married couples should obtain individual reports rather than joint reports, as it is easier to challenge inaccurate information for each of you. It is also easier to challenge information on reports obtained from the credit reporting agencies separately rather than from a report, which combines information from two or all three agencies.  The reports obtained through www.annualcreditreport.com are separate and thus easier to review and then challenge inaccurate information.

When you have your reports, review them, note inaccurate or unknown information, report back to the respective credit reporting agency and ask them to “validate” the inaccurate items.  Most people ask the credit reporting agency to "verify" rather than "validate" the inaccurate information.  It is  easier for the agencies to meet the legal threshold of "verify" than it is the threshold of "validate".   The law requires the agency to "validate".  Ask for the same. 

Several attempts may be necessary to obtain an accurate report from each. The credit reporting agencies are good at using delaying tactics.  Keep at it.  Stick to your guns. 

What about negative information, such as bankruptcy, judgments, and collections?  Bankruptcies "must" be removed from your credit report after 10 years and judgments, collections and other negative items after 7 years. 

However, nothing in the law requires any negative item to remain for a "minimum" amount of time.  It is generally thought that if you have a bankruptcy on your record or other negative item that you are figuratively in "credit prison" for 7 to 10 years. 

The reality, however, is that if there is "inaccurate" information being reported within an item that otherwise is accurate, you can legally challenge it and if the agencies can't validate the item and correct the inaccurate information, they must remove the item from your credit report.

For example, let's say you filed bankruptcy two years ago.  It is being reported accurately, except that the assets and debts are being reported as zero.  Obviously, if you filed bankruptcy you would have had assets and debts. 

Because these items are being reported as zero, the item is inaccurate and must be removed unless they validate the item and include the proper amounts for assets and debts.  Any item being reported must be 100% accurate or it must be removed from your report. 

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A survey announced June 17, 2004, by U.S. PIRG (The U.S. Public Interest Research
Group) found:

"One in four credit reports contains errors serious enough to cause consumers to be denied credit, a loan, an apartment or home loan or even a job, according to a new survey released U.S. PIRG.

'The big credit bureaus and big business tolerate big mistakes in credit reports,' said Ed Mierzwinski, U.S. PIRG Consumer Program Director. 'But those mistakes ruin the financial reputations of hardworking Americans.'

Three national credit bureaus, Equifax, Experian, and Trans Union, collect and compile information about consumer creditworthiness from banks, creditors and from public records such as lawsuits, tax liens and bankruptcy filings. The so-called "Big Three" each maintains a file on nearly every adult American. The resulting credit report amounts to a consumer's financial résumé. The credit score calculated from this report is a consumer's financial SAT.

Over the last decade, the state PIRGs and other consumer organizations have issued numerous reports showing that sloppy credit bureau practices are at fault for errors in consumer credit reports.

'It is outrageous that inaccurate credit reports could damage 1 in 4 consumer's ability to buy a home, rent an apartment, obtain credit, open a bank account, or even get a job,' said Mierzwinski.

U.S. PIRG collected 200 surveys from adults in 30 states who reviewed their credit reports for accuracy. Key findings include:

• Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit;
• Seventy-nine percent (79%) of the credit reports contained mistakes of some kind;
• Fifty-four percent (54%) of the credit reports contained personal demographic identifying information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;
• Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open."

So, with 79% of credit reports containing mistakes of some kind, don't you think it makes sense to check your credit early in the process?

Next: Not Understanding Financing Options or Getting Pre-Approved For a Mortgage