ByAli Sahabi of Optimum Group, LLC
President, Building Industry Association (BIA) Baldy View Chapter
Back in the pre-internet days, credit scores were equal parts mystery and danger. Mystery because it required not one but three inquiries to each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion; and danger because inquiring into one’s credit score could raise red flags with reporting companies and potential creditors. Today, however, television is filled with ads for services that report your credit score immediately and many boast that inquiries no longer harm your credit score. The bad news is: some of these services may require regular fees, charges or are simply marketing devices to get you to buy other services or products.
That is why homebuyers and owners should take their first step when preparing to purchase a home by ordering a free credit report (actually called a credit file disclosure) from www.annualcreditreport.com - the only service authorized by federal law. This site allows you to request a free credit report online, by phone or by mail once every 12 months from the three credit reporting companies.
Your credit score provides a potential lender the single most important piece of information required to calculate the mortgage rate and the amount that can be borrowed. Mortgage lenders, insurance companies and even prospective employers will use your credit risk score to determine whether or not you’re a good risk. Lenders use a variety of scoring models to measure your creditworthiness, but the one used by most lenders is the FICO or FICO Classic score, created by the Fair Isaac Corporation. FICO scores range from 300 to 850 with higher numbers being better than lower scores. If all of your scores fall below 650, that may indicate that you need debt or credit counseling.
Your credit report is organized into sections detailing your personal information, a credit summary, your account information, additional inquiries (other potential creditors who also want to examine your credit history) and collections and public records. You should also receive summaries of your rights under state law and the Fair Credit Reporting Act along with information on how to dispute misinformation found in your report.
If you find that only one score from the three reporting companies is considerably lower than the others, find out if it is due to a mistake or an issue with a current lender. If so, contact them immediately and follow up every conversation with a letter summarizing the discussion. If the scores align, scoring agencies will provide information about problem areas such as late payments or having too many open lines of credit. These issues can be corrected over time by making prompt payments, paying more than the stated minimum payment and lowering existing balances.
If some of the issues bringing your score down occurred a long time ago and may have been triggered by temporary economic setbacks, consider consulting with a debt counselor as to how to make the case that your present circumstances make you less of a risk. Check with your bank or your local chamber of commerce to find a reputable debt counselor near you.
However, before you order your credit score, analyze your current financial situation. Make sure that you’ve not charged up debt more than about 20 percent of your available credit. If you have cash in the bank, consider whether your credit rating might be better served by paying down your credit cards. Make sure you make the biggest contributions to those cards with higher balances or interest rates - even if it means taking longer to pay down those particular accounts. Then, continue making diligent and timely payments, avoid any major purchases that push your credit and refrain from opening new lines of credit.
The Building Industry Association (BIA) Baldy View Chapter seeks to advance the opportunity to attain the American Dream of homeownership. For more information on homebuying, selling, finance or improvements; visit www.biabuild.com on the web.