As a first-time homebuyer, you might not be used to how a credit bureau works. They hold a lot of the power when it comes to getting a loan approval. If your credit reports are bad and you have a low credit score, finding a loan program could be harder than you thought.
In this guide, we’ll walk you through what the credit bureaus report and what you can do to make sure it’s positive information rather than negative.
Learning About Credit Scores
First, you should understand credit scores. You have three of them, one each from Trans Union, Equifax, and Experian. These credit bureaus have specific trade lines that report to them. The bureaus then put the payment history in a report and use their algorithm to come up with your credit score.
You may have different credit scores from each bureau; that is normal. Not all creditors report to all three bureaus, but some do. Mortgage lenders will pull all three reports and take the middle score for each borrower for qualifying purposes.
A great credit score is one over 740 (they go up to 800). A good credit score is one between 670 and 739. This is about the lowest lenders will go when considering a mortgage loan. Anything below 670, down to 580 is considered ‘fair.’ You may find government-backed programs, such as FHA for this score, but that’s about it. If your score is below 580, you’ll have some credit repairing to do before you should even consider a mortgage.
Now, this doesn’t mean you have to have the illustrious 800 credit score. If you fall somewhere between 670 and 739, you are usually in pretty good shape. If you fall below 670, you may want to see what you can do to fix your credit (see below) or consider an FHA or USDA loan, both of which allow lower credit scores.
You can learn your actual credit score from a lender that pulls your credit when you apply for it. You can also pay for your score through AnnualCreditReport.com. They do provide you with three free credit reports (one from each bureau once a year), but the reports do not include the score.
Improving Your Credit Score
Now, if you find out that your score is lower than you thought, you may want to improve it. This doesn’t happen overnight. It will take time and consistency to get your score to increase, but it could be worth it in the end.
These few simple habits will help your score increase:
- Make all of your payments on time
- Pay down excessive debts
- Keep all accounts open, even if you pay them off
- Fix any errors on your credit report
- Have a good balance of installment and revolving credit
- Don’t open any new credit
We want to pay special attention o the ‘fix any errors on your credit report’ here. This is crucial and is why you should always pull your free credit report from all three credit bureaus. Mistakes happen on credit reports all of the time and you are the only one that can fix them.
If you see that there are accounts reporting in your name that don’t belong to you or payments reporting late that you know you paid on time, you have to alert the credit bureau. You’ll have to make it official by sending them a request for review in writing. You should also include any proof that you have that shows the report is wrong. The credit bureau must then go to the creditor and ask them to review it. If the creditor lets 30 days pass before reviewing your account, the bureaus must remove the account automatically.
The Other Information Credit Bureaus Report
Contrary to popular belief, the credit bureaus report more than your payment history. They also include information including:
- Personal identifying information – This includes your name, social security number, birth date, current address, and previous addresses
- Employment information – This includes your current and previous employers
- Public records – If there are any public records regarding you in the state or county court, they will be on your credit report
- Credit inquiries – Anytime you apply for new credit, an inquiry will show up on your credit report alerting any future banks that you apply with that you just applied for credit elsewhere
Your credit report is like a look at your financial and personal life. The personal information doesn’t affect your credit score, but everything else does. It gives lenders a birds-eye view of your financial responsibility. If you have a lot of late payments, collections, or even inquiries on your credit report, lenders will ask more questions. The information provided by the credit bureaus is a way to get lenders started in fully evaluating your financial responsibility.