How can I improve my credit score?

A woman who was recently in the market for a new home discovered that her credit report was blemished, all because of a late payment on her existing home mortgage. This came as a surprise to her because she always paid her bills on time.

She contacted her bank immediately and reported the error. The bank acknowledged that a mistake had been made, and issued a letter stating this to the credit bureau. Even so, it can take a couple of months at least before a mistake like this is corrected.

In this case, the buyer was able to obtain the loan she needed despite the credit error because she had a cash down payment of more than 50 percent of the purchase price. But if she, like many buyers, had a cash down of 10 percent, or less, she might have been turned down completely, or only qualified for a less desirable mortgage.

When a late payment or similar credit blemish shows up on your credit report, it can lower your credit score and make loan qualification more difficult. Increasingly lenders are using credit scores to streamline the mortgage approval process. A credit score gives a picture of your credit situation at a given point in time.

The information in your credit files at the credit report bureaus is used to derive a number that indicates the likelihood that your will repay a debt, like a mortgage. The good news about credit scores is that they enable lenders to process loans more quickly and more impartially. The bad news is that a mistake in your credit report can wreck havoc with your home buying plans. And, mistakes are all too common.

HOUSE HUNTING TIP: Order a copy of your credit report at least 90 days before you plan to make a home purchase. The three major credit reporting agencies are: Experian (888) 397-3742, Equifax (800) 685-1111, and Trans Union (800) 916-8800. Small errors in a report might have little effect on your credit score, but major errors like late payments on a home mortgage can seriously lower your score. Lenders don’t like to lend to borrowers who have a past history of missing their mortgage payments.

Ask your mortgage broker or lender to interpret your credit report for you and make recommendations about what you can do to improve your score. If there are errors in your credit report, inform the credit bureau, and the company that created the erroneous credit record, that you are disputing the information. This must be done in writing. You have the right to request that the credit bureau include your account of the disputed record in your credit file.

Having too much credit can negatively impact your credit score if you have a history of mismanaging credit. But, racing out to close accounts may not be a quick fix to a bad credit score. It’s better to pay down the balances on your credit accounts. Closing them won’t necessarily remove them from your credit file.

Lenders like to lend to borrowers who have a good history of managing credit. Prospective borrowers who have never established credit can be at a disadvantage when applying for a mortgage. This may change in the future. Credit scoring companies are working to establish alternative ways to score consumers who have no debt history. But, this will take time.

To establish yourself in the credit world, open a few charge cards, being careful not to open more accounts than you need. Then charge a few items on each and pay the balances off in full.

THE CLOSING: This is how you establish a positive credit history.

Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.

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