Know yourcreditscore inside and out

Your credit reports and credit score are among the most important tools that financial institutions use to evaluate your mortgage application. Your credit reports inform your score, and a drop or a rise in your score can have a great effect on the amounts you pay throughout your loan term.

As a mortgage applicant, it is very important to review your own credit reports for accuracy. It’s also important to review your own negative financial habits, as they are reflected on your credit reports, and work to correct them far in advance of shopping for mortgage loans.

With enough time, you can change your current financial habits into healthier behavior. Those behaviors aren’t just important for your application—they can preserve the quality of your credit through your mortgage term, and keep you out of financial trouble.

Here is what you can do:

Evaluate your credit early. If you review your credit reports and scores at the time that you start saving for a down payment, you give yourself plenty of time to correct existing mistakes. You will also have time to establish a lengthy, positive pattern of behavior to replace any negative marks on your credit report.

Order all three credit reports. Experian, Equifax, and Transunion are the three major nationwide credit bureaus. They collect data from lenders on owed balances, credit limits, your history of payments, and other information that can indicate your creditworthiness.

Because a mortgage loan may be the largest loan you ever apply for, you don’t want to leave anything to chance. With all three credit reports, you can review the information that a financial institution will see, and work on improving that information.

You’re entitled by law to one free credit report every 12 months from each of the three major credit bureaus, which you can obtain through the official website www.annualcreditreport.com. You can also link to this website through the Federal Trade Commission, www.ftc.gov.

Review your reports and your spouse’s reports together.  When you’re purchasing a home with your spouse, your mutual credit will determine the results of your application.  This early review helps you lay out a game plan for improving your credit together. Whether the problem is high balances or late payments, you can support and reinforce positive changes in each other, and rehabilitate your credit that much more quickly.

Check your credit reports for errors. Look for any accounts that you didn’t open yourself, and report fraudulent activity as soon as possible. Also pay special attention to credit limits and any late payments that are listed on your credit report. Verify whether or not they were late, and if you find a mistake, go to the lender and correct it. It can take time to process a correction, so an early review is essential.

Order your FICO scores. Your credit score is shorthand for your credit quality. When you see where you fall on the credit quality range, you can determine how much more work you have to do in improving your credit. You will have to pay for FICO scores, so first decide if the snapshot will be worth the cost.

Next week, we’ll review specific steps you can take to improve your credit.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.

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