When you’re planning on buying a home, your credit score will have a
big impact on your interest rate and loan terms. If your score falls on
the lower end of the scale, you’ll pay a higher interest rate. Dip too low, and you may not get approved at all.
Boosting your credit score can help you find a better mortgage deal,
but be careful how you go about it. Companies promising to repair your
credit for a fee may seem like a good bet, but you’re better off saving
your money and rebuilding your credit yourself.
Credit Repair Clinics
Credit repair clinics all have the same promise – they’ll fix your
credit seemingly overnight. But as the saying goes, if something sounds
too good to be true, it probably is. Rather than use legitimate tactics,
“Credit repair companies simply bombard the credit bureaus with letter
after letter in the hopes of getting legitimate, accurate information
removed from your credit report,” said Michael Mack, consumer lawyer and founder of the Bankruptcy Credit Foundation.
While this occasionally works, Mack warned that the results don’t
stick. Many creditors will do a soft-delete, meaning the negative mark
will reappear on your credit report 60 to 90 days after the credit
repair clinic has done its work.
As a result, you’ll end up paying the clinic either by the month or per item deleted, and the cost can add up quickly.
DIY Credit Repair
Repairing and rebuilding credit scores yourself is free and something
anyone can do. Mack recommended starting by ordering a copy of your
reports from Equifax, TransUnion and Experian. By law, you’re entitled
to free copies once per year through AnnualCreditReport.com. Once you have your reports, order your credit scores through an authorized website like myFICO.
Look for “obvious errors and inaccuracies like wrong name, address,
accounts showing twice, collections which continue to be reported twice
for the same account,” Mack said. If you find errors, send a certified
letter to the credit bureaus asking them to investigate and correct the
problem. Send a letter for each error you find. “Even though this is
more time-consuming, you will get better results.”
Pay off your old debts through a negotiating tactic known as goodwill letters.
“Even negative items on your credit report that are accurate can be
legally and ethically and permanently deleted through goodwill letters,”
Mack said. “State
politely how you were late, or how you were delinquent, and what you’re
doing to correct your bad habits.” You can offer to pay the debt, or
settle for a portion of the amount owed in exchange for the creditor
removing the negative remark from your credit report, he said.
Meanwhile, pay your bills on time each month — payment history
accounts for 35 percent of your credit score — and keep your credit card
balances low. Mack recommends keeping your balance under 9 percent of your total available credit limit.
Avoid These Mistakes
Don’t close old accounts: “Closing accounts hurts your score,” Mack said. Instead, pay off the balance and leave the account open.
Don’t apply for several new credit-card accounts: “FICO allows ‘rate shopping,” Mack said. “You can apply for 20 different mortgages in a 45-day period and it only accounts as one inquiry under FICO. Likewise you
can apply 20 different times for a car loan or installment loan and it
only accounts for one inquiry. But with revolving credit it’s different,
and the more inquiries you have in a 12 month period, the lower your FICO score.”
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