Understanding Credit Scores and Repairs

Understanding and Improving Your Credit Score for a Mortgage Application

When applying for a mortgage, understanding and managing your credit score is crucial. Here is an overview of credit scores and strategies for improving them.

Credit Report

The first step is to obtain a current copy of your credit report. Under the Fair Credit Reporting Act, consumers are entitled to one free credit report annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Since entries can vary between these bureaus, it is advisable to request a report from each one. You can access your free reports at Annual Credit Report.

Credit Score

Understanding what constitutes a good credit score is essential. Generally, scores classified as "A-paper" begin around 680, though this threshold may vary slightly among lenders. If your score is below this range, there is still potential for improvement. Increasing your score by even a few points can result in substantial savings. For instance, raising your score from 698 to 703 could lead to significant savings over time due to a more favorable interest rate on your mortgage.

Strategies for Improving Your Credit Score

1. Distribute Credit Card Debt: To improve your credit score, evenly distribute your credit card debt across your accounts. For example, if you have a score of 665 and debt on only one card while maintaining zero balances on four others, redistributing the debt could potentially elevate your score.

2. Maintain Active Accounts: Avoid closing old credit accounts, even if they have zero balances. Keeping these accounts open contributes to a longer credit history and can positively affect your credit score. Closing old accounts can reduce your credit history length and increase your debt-to-credit ratio.

3. Minimize Credit Inquiries: Each credit inquiry can impact your score, typically between 2 to 50 points. When applying for a mortgage or auto loan, multiple inquiries within a 14-day period are treated as a single inquiry, so try to consolidate your inquiries within this time frame to minimize their impact.

Improving your credit score takes time and effort. It is advisable to start this process three to six months before applying for a mortgage.

Credit Repair Options

If credit repair is necessary, you can either handle the process yourself or seek assistance from a credit repair service. For self-managed improvements, explore various resources online to familiarize yourself with credit laws and consumer rights. The Federal Trade Commission (FTC) provides extensive information and resources that can be beneficial.

If your credit issues are severe or complex, consider engaging a professional credit repair company. Before selecting a company, review the FTC's guidelines on credit repair and ensure that the firm is reputable. The FTC’s website offers information on avoiding fraudulent practices and credit repair scams.

Addressing credit issues may seem challenging, but taking these steps will bring you closer to securing your ideal home.