Credit Bureaus Consumer credit information is obtained and stored by three credit bureaus:
- Trans Union Corporation
FICO Score Each report produces a score, called a FICO score. This is a summary or snapshot of your credit that is used by lenders to quickly determine if you are a good candidate for a loan and what interest rate you will pay based on your creditworthiness. Unfortunately for consumers, credit reports are often full of errors. They may inadvertently post a negative mark by transposing your social security number, or they may fail to remove negative items that have been paid or resolved. All negative marks will lower your credit scores. It's your responsibility to look at your reports and make sure they are accurate. You can visit annualcreditreport.com once a year to get copies of all three credit reports. If you find an error that needs to be repaired, take action immediately. It can take weeks for an error to be removed from your report, so start immediately. If you show your lender proof that the negative mark is incorrect, they will likely proceed with the loan but insist that the credit bureau post the correction before closing. The best way to protect your credit is to use it and pay off your debts quickly. Keep accounts that you've had a long time open, and use them occasionally. Again, quickly pay them off. Tips For Keeping Your Credit Scores Higher
- Don't close credit card accounts. Keeping lines of credit open is beneficial to your income-to-debt ratio and will help you keep your FICO scores higher.
- Don't max out or consolidate credit cards. Credit card companies like it if you only use about 30% of your available credit on your card. You're better off having small balances on multiple cards than a large balance on one card.
- Don't apply for new revolving credit, consolidate or transfer balances. It's tempting to buy new furniture for your home, but don't open that account until after your loan closes. You don't want “inquiries” to be raised in the scoring algorithm.
- Don't change jobs right before you apply for a home loan. If you have to change jobs, changes within the same field are considered more favorably in scoring.
- Do pay all bills on time and with at least the minimum payment due. Lenders like on time payment histories.
- Do pay down your debt. Lower income-to-debt ratios are attractive to lenders. Start by reducing credit card balances first, beginning with the balances with the highest interest rates. Revolving credit is considered riskier debt than installment loans such as student loans or car payments.
- Do shop lenders simultaneously. Credit score software takes into account several inquiries from mortgage lenders as normal, but if you space rate-shopping out over weeks or months, it could impact your credit score.
Remember, mortgage lenders are most interested in your ability to repay the loan. The most important factors are job and debt payment history. Job security (long-term employment in the same field) and on time credit payments are the best ways to build and protect your credit.