One of the most important things that is required during the home-buying process is your credit score. Lenders grant a loan and set the interest rate on the basis of this credit score. This is why, it is highly important that you clean up your credit history before approaching a lender. There are a lot of factors in the credit report that can destroy your financial history.
In the US, you are entitled to a free credit report every year from three credit bureaus: TransUnion, Experian and Equifax. It’s a good idea to take advantage of this service and make sure that the trade lines reporting are accurate.
Whenever you approach a lender to get pre-qualified to purchase a home, the lender will pull a tri-merged credit report (meaning all three credit bureaus are reporting data and a score for you). Typically, the lender must use the middle of the 3 scores for qualifying and pricing purposes. Generally speaking, you want your credit score to be over a 620 in order to quality. If under a 620, the lender might give you some tips to improve your score or they might refer you to a credit repair company.
Let’s have a look at how you FICO score works:
FICO Score Calculations
6 Steps to Cleaning Your Credit Report
1. Review Identification Info
The three identifying pieces of information about you that should be accurate on the credit report are: your social security number, address and name. Stop obsessing over the low credit score! First, make sure that the report lists your accounts only. An error in the social security number can cause a huge problem.
2. Check for Any Discrepancies
Discrepancies include any negative information about an account that does not belong to you. This could either mean a mistake on the companies’ part or identity theft. Make sure that any negative information that is more than 7 years old is removed from your account. Moreover, Chapter 7 that deals with bankruptcies only remains on the credit history for 10 years. Look for these 2 red flags and get them fixed immediately.
3. Pay Attention to the Phantom Money
Phantom money is an outstanding balance on a trade line that you quit making payments on but still shows up once the balance transferred to a collection agency.
For example: You have a credit card that you quit paying on but still have a balance on. The creditor will eventually sell your account to a collection agency. Technically, the balance should now drop to zero from the original creditor. If it doesn’t, two outstanding balances for the same debt will appear on your credit report because the collection agency opened another account in your name.
4. Dispute Mistakes Immediately
If your credit report shows an inaccuracy, file a dispute form immediately so that you can get the negative information removed. When an account is in dispute, that trade line does not impact your credit score. However, depending on the type of home loan you use and depending on the status of the trade line (whether it has always been paid on time or if it has late payments in its history) your lender may require you to remove the dispute prior to closing on a home.
5. Keep Credit Card Balances Low
A good rule of thumb is to keep the balance on your credit cards at or below 20% of the max limit. You can spend more than 20% on the card, but be sure to pay it down each month to at or below 20% for best scoring results.
6. Don’t Close Accounts
If you no longer use some of your trade lines, leave them open. This will show on your credit report that you have no outstanding balances and that you pay all your debts on time.
Follow these six steps and you will be able to clean up your credit report. Remember, all you have to do to keep your credit score on the up and up is to make every payment on time.