Can I qualify? Tips from insiders on catching errors in your credit report andimproving your score
To state the obvious, your credit score has a big impact on your ability to qualify for a mortgage, and your score depends on what's on your credit report.
For that reason, it's important that you review your credit report regularly.
While a recent study reported the incidence of significant errors on reports is fairly small, our experience contradicts those results, and an error could prevent you from qualifying.
It's likely the study only identified items creditors were willing to correct. I find many reports have negative items creditors are just too pigheaded to correct.
Maybe the hospital and your insurance company are arguing about coverage for a procedure, and the hospital reported the bill to a collection company. Maybe you returned your cable box, but the cable company didn't note it on your account. Maybe your landlord said he was going to let you break your lease, then reneged after you left. The study didn't address these types of errors, and to find them, we need to look at credit repair.
You are entitled to a free copy of your credit report from each of the three credit bureaus (Experian, Transunion, Equifax) once a year. You can request your report online, by mail or phone. If you have the discipline, I recommend requesting the report from a different credit bureau every four months (you can request your report from only one bureau at a time), which gives you the best chance to catch something early. You're looking for two things: accounts that you didn't open and errors in reporting. The report doesn't include your FICO score, but that's not really important for the task at hand.
If you find an error, the Fair and Accurate Credit Transactions Act (FACTA) provides you with certain rights to help get it corrected. To better understand those rights, I spoke with a credit repair expert, Doug Buford of Better Life Credit. Buford said the most important part of FACTA is the word "accurate," and a lot of creditors don't report accounts accurately. If you identify inaccurate account information, the act requires that creditors remove it from your credit report.
Buford stressed that the creditors and bureaus are not allowed to change account information to make it accurate. Once you prove an account is inaccurate, "the credit bureaus have to notify the creditor that they can no longer sell that debt and that they have to eat it."
Buford said the bureaus are required to verify any account you dispute, and you can ask for the written documentation they used for verification. From the date a dispute letter hits a bureau's desk, it has 30 days to respond. If the dispute is resolved in your favor, it may take 45 days for the correction to show up on your credit report.
You can dispute accounts yourself, or you can use a credit repair professional. If you choose the do-it-yourself route, you can dispute the inaccurate account by mail, by phone, or online. Burford suggested that you always dispute by mail. With phone disputes, you don't have a record. Burford also said the online dispute systems operated by the credit bureaus have onerous "fine print" that states you cannot dispute the same account again.
When done by mail, you can dispute an account again if you have new information or documentation. You can find a number of resources on the Internet with instructions on how to write and file a dispute (including here, here, and here).
Disputing accounts is a lot of work and often requires multiple iterations with the credit bureaus. If you choose to use a credit repair service, the cost should be around $1,000, and the process may take six to nine months. Buford's claim for successfully removing negative accounts is similar to other credit repair services — in the 70 to 80 percent range.
One really lousy way to try to improve your credit score is disputing all negative accounts without supporting documentation. It is true that when you first dispute an account, the credit bureaus remove the account from the credit score calculation.
However, lenders have gotten wise to this trick. If a credit report contains disputed accounts, lenders typically will subject the loan application to extra scrutiny, including considering how the negative items could affect your ability or willingness to pay your mortgage. In some cases, the lender won't even consider the application.
Another lousy way is paying off old collections. Paying an old collection can hurt your score more than it helps. According to Buford, "once an account goes into collection, the credit bureau computer no longer looks at the dollar amount. It just says collection account, reduce score."
If you pay a $1,000 collection, the next month your credit report will show a balance of $0, but it will have no positive effect on your score. The computer doesn't care about the amount, but it does care about the date of last activity, which is going to be today. The more recent the activity on a collection account is, the greater its negative effect will be.
Sometimes you cannot remove negative items from your credit report, especially when you experience a financial crisis, like a bankruptcy.
Next week we'll talk about how to qualify for a mortgage after a financial crisis.