If you’ve got a less-than-stellar credit report and credit score, you’ve got plenty of company. According to MSN.com, more than 43 million people in the United States have FICO credit scores under 620, making it difficult for them to obtain loans and credit cards with reasonable terms.

Obviously, the first step in improving your credit is to know what the three nationwide consumer reporting companies – Experian, Equifax, and TransUnion – are saying about your credit. As is stated on our About Credit page, every American consumer is entitled to a free credit report once a year. You can obtain your once-yearly free credit report at www.annualcreditreport.com. Please do not contact the three credit bureaus individually. They will only provide you with your free credit report if you request it via www.annualcreditreport.com, by calling 877-322-8228, or by writing to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

While the credit report is free, unfortunately, obtaining your credit score is not free. You can visit the websites for Experian, Equifax and TransUnion and obtain your credit scores from each of these credit bureaus, but don’t be surprised if your credit score varies slightly from company to company.

Even if your credit is good, it’s a good idea to make it better before applying for a mortgage. As you’re aware, the better your credit score, the better the terms of your home loan! So… what’s a great credit score? 700 or above. You’re most likely already getting good terms on your loans and credit cards if you’ve got a score of 700 or above. As such, there’s really no need to improve your credit unless there’s a glaring inaccuracy on your report. From 699 to 680 is good and you’ll get good terms on your home loan, but it’s not a bad idea to improve your score, if possible. 679 to 620 is OK but it does mean that your terms won’t be as good as if you had good or excellent credit. You’ll most definitely want to improve your score in order to obtain better home loan interest rates. If you have a credit score lower than 620, you’ll need to work on improving it before applying for a mortgage.

So how do you improve your credit score? Take the following steps and improve both your credit score and your chances of home ownership.

Dispute Inaccuracies.

Carefully look over that free credit report that you received from www.annualcreditreport.com. If you see significant inaccuracies, dispute them! When applying for a home loan, it’s vital that the credit report submitted to our lenders is accurate. But not all inaccuracies are significant. So let’s go over what credit report inaccuracies you should fix as well as what’s not so important.

What should you fix?

  • Any negative items that aren’t yours… especially late payments, charge-offs, and collections.
  • If you paid any accounts on time and in full, make certain they’re listed as such. Dispute inaccuracies that list accounts as “paid derogatory,” “paid charge-off,” “settled,” or anything other than “current” or “paid as agreed”.
  • If your lender is reporting a lower credit limit than they’ve provided to you, it can hurt your credit score. Be sure to correct inaccurate credit limits.
  • Have you ever filed for bankruptcy? Make sure that any accounts that were included in a bankruptcy are not still listed as unpaid.
  • Items older than seven years – or items older than 10 years in the case of bankruptcy – should automatically fall off of your credit report. Be sure to dispute negative items that are older than seven years (or, of course, 10 years if you filed for bankruptcy). One caveat… be careful when removing old items – even if they are negative. If the old item indicates a long credit history and most of the other items on your credit report are more recent, you could be removing an item that establishes your credit longevity. It may sound harsh but, sometimes, removing derogatory credit items – particularly older credit items – can actually hurt your credit score.

Don’t worry about inaccuracies such as outdated addresses or employers. And if you see accounts that you closed still marked as “open,” no worries. The same goes for accounts that you closed if the report doesn’t say “closed by consumer.”

One other thing worth mentioning… don’t close accounts… even if you no longer use them. It actually can hurt your credit score and won’t help in improving it. (BRUCE… Is that accurate?)

There are other ways to improve your credit via dispute. Let’s say that you had a dispute with a creditor that resulted in a negative mark – such as a collections account. Dispute it… if it’s an old negative and it’s for a small amount. The credit bureaus may not even contact your creditor for an old dispute with a small debt. And every little bit helps.

Get a credit card.

You don’t have to carry a balance on your credit card to have a good credit score. Just apply for a credit card and use it occasionally to build your credit score – making sure that you pay the full amount required and that you pay it on time. If you’re worried about making monthly payments, charge something affordable and then pay off the full amount as soon as the bill comes due.

If you don’t qualify for a credit card, don’t fret. You may be able to obtain a secured card. With a secured card, the issuing bank or financial institution provides a credit line the equivalent to the deposit you make. In essence, you’re charging purchases with your own money while simultaneously establishing or improving your credit.

Apply for an installment loan.

If you already have a credit card, taking out a small installment loan is a great way to improve your credit quickly. It shows that you can be responsible with both revolving credit (such as credit cards) and installment credit (such as a personal loan.) But keep in mind that taking out a large installment loan – such as an auto loan – can hurt you if you want to qualify for a mortgage. It really depends on your timeline for obtaining a mortgage and the amount of the car loan. Make sure that you can afford both the car loan and the home loan. If you can’t afford to make both the car loan payments and the mortgage payments, that car loan may just prevent you from qualifying for a mortgage. That being said, you’ll get the fastest improvement on your credit score if you show that you’re responsible with both major types of credit: revolving (credit cards) and installment (personal loans, auto loans, student loans and, of course, mortgages).

Pay down your credit cards.

Most people think that they need to pay off their installment loans to better qualify for a mortage. In truth, you’re far better off paying down – or paying off completely – your credit cards. It’s best that lenders see that you have a large gap between your credit limit and the balance on your credit cards. Try to get your balances lower than 30%. In fact, 10% is even better. And while it might save you money to pay off the credit cards with the highest interest rates first, if your intent is to improve your credit, you’d be wise to pay down the credit cards that are closest to their credit limits first.

Don’t rack up high credit card balances.

Despite the fact that you may pay your credit cards on time and in full each month, if you consistently have high balances on your credit cards, this, too, can hurt your credit score. It’s the balances on your credit cards that get reported to the credit bureaus every month. If those balances are being reported before you pay your bill, it will appear on your report that you consistently have high balances. If you use your credit cards often and typically have high monthly balances, try paying down the balance between payments by making two payments a month… just make sure that your second payment falls within the timeframe given by the credit card company so that you don’t get a late payment reported on your account (and you don’t get socked with a late fee.)

Continue to use your old credit cards.

Even if you apply for and receive new credit cards, continue to use your old credit cards as well. Longevity speaks volumes when it comes to credit reports and credit scores. If you rarely use your older credit cards, you run the risk that the creditors will close your accounts or stop reporting on those cards to the credit bureaus. Even if the credit cards still appear on your credit report, the credit bureaus might not give these old accounts as much weight when determining your credit score unless the accounts are active.

Write a goodwill adjustment letter.

If you’ve made a few late payments to a lender with whom you have a long history as a good customer, it’s worth a try to write a goodwill adjustment letter where you point out that you’ve been a valuable customer and you hope that they can remove the negative remarks from your credit report. Some lenders may realize that they value your business and they may just comply. It’s best to ask in writing. Feel free to use our sample letter found below:

[Your Name]
[Address]
[City, State, Zip]
[Optional Phone Number and/or Email Address]
[Account Number]

[Date]

[Company Name]
[Address]
[City, State, Zip]

Dear [Company Representative],

Since [year], I have enjoyed immensely being a customer of [Company Name]. I am writing to you today to ask if you would be willing to make a goodwill adjustment to your report on my account to the following three credit bureaus: Experian, Equifax and TransUnion. I made [number] late payments on the account referenced above on Sunday, May 20, 2012, Sunday, May 20, 2012, and Sunday, May 20, 2012. {Include all dates where you made late payments} But since Sunday, May 20, 2012, I have paid my account on time every month. Because of my overall exceptional payment history with [Company Name] over the last [number] years, I am asking you to consider removing the negative payments from my credit report. I have been thrilled with [Company Name] in all the years that I have been a loyal customer and I hope to continue a long relationship with [Company Name] in the future. [Insert your reasons for why you made late payments… if you lost your job or had financial difficulties – especially if the reason for the financial difficulties has been resolved. Be sure to share with the company that you're back on your feet financially.] I look forward to hearing from you about my request for a goodwill adjustment.

Sincerely,

[Your Signature]
[Your name printed]

If you’ve made more than just a few late payments but you’ve made twelve (12) or more payments on time, rather than ask for a goodwill adjustment, you can always ask for your account to be “re-aged.” Re-aging an account means that the lender sets your accounts due date back to current. Should a lender agree to re-age your account, they have to follow federal guidelines in doing so. They can only re-age your account once in a twelve-month period and twice in a five-year period. Understand that lenders do not have any obligation to comply with your re-aging request.

To be eligible for re-aging:

  • You must demonstrate a willingness and ability to pay on your account regularly – the minimum payment and on time. Don’t ask for re-aging if you still can’t make minimum payments or if you can’t keep up with the monthly due dates. Don’t waste your request because – as stated above – you only get two opportunities to get your account re-aged  over the next five years.
  • You have to have had the credit card account for at least nine (9) months.
  • You need to make at least three consecutive payments of the minimum amount before asking for re-aging.

In addition to asking for re-aging in writing, it’s a good idea to get an agreement concerning the re-aging from the lender. If the lender is reluctant to put the agreement in writing for you, do it yourself. Put the details of the re-aging in writing and send it to the lender. Be sure to keep a copy for your own records.

Remember that we’re only a phone call away and we’d be happy to help you improve your credit. Contact one of our Loan Officers today at 877-451-3100.