Remember when you were a kid and your mom or dad would tell you what to do?
"Clean up your room!"
"Take out the garbage!"
"Mow the lawn!"
We all did these things because, well, we didn't have a choice. "While you're living under my roof, young man," my parents would say, "I make the rules."
Who among us didn't cringe at hearing that? And many of us thought, "Man, I can't wait until I'm a grown-up. No one will be bossing me around. I'll be able to do what I want, when I want."
Well, fast forward to today, and the joke is on us.
Instead of living under Mom and Dad's roof, we live under our own. We may even own some rental property or a vacation home.
Problem is -- they're not really ours.
If you're renting, you're paying a landlord
each month. If you're a homeowner -- unless you're mega-rich and buying property with cash
-- you're sending mortgage
payments to Chase or Wells Fargo or whatever other financial institution holds your mortgage.
And the process of getting that house is even more out of your control. You apply for a mortgage. If you're approved, you get assigned a mortgage interest rate that you have little say over. If you don't have enough of a down payment -- and who does these days? -- you're forced to fork over extra money
for private mortgage insurance
And then there's the mountain of indecipherable paperwork you must sign before you get the keys to your new place. It's all a mess, quite frankly, and one of the most stressful things most of us will ever do.
However, there is one key element of the mortgage process over which you can take some control. And for about 10 million Americans, failure to do so could cost them thousands of dollars.
What should they take control of?
"Wait, wait, wait," you say. "I don't have any control over my credit report."
But you're wrong. Here's why.
The federal government gives you free access every 12 months to your credit reports from the three major reporting bureaus: Experian, Equifax and TransUnion. Go to AnnualCreditReport.com
to get yours. (And only go there. It's the only official, government-mandated site that is truly free, with no possible strings attached.)
Once you've gotten your credit report, scour it. Examine every line of it. Spend as much time as it takes to make sure that everything's accurate. And if you see something that is incorrect -- for example, an outdated address, a phantom missed payment or an account you never had -- contact the bureau immediately and dispute it. (Here's a rundown from the Federal Trade Commission
on how to dispute a credit report error.)
And mistakes happen constantly. In a Federal Trade Commission survey
of 1,001 Americans, about one in four (26%) found at least one potential error on their credit report. Because the bureaus have reports on 200 million Americans, that could mean
that about 50 million Americans' credit reports contain an error.
The bureau must investigate your claim -- usually within 30 days. This process can be a bit of a mess, and there's no guarantee that it will work out in your favor. Some people have horror stories of being unsuccessful in getting inaccurate information changed or removed from their reports. Those are typically the exception to the rule, however.
If the disputed information is found to be inaccurate, the company that initially reported it to the credit bureau
must report it to all three major bureaus so they can correct your file.
It may all sound like a lot of work for you, but it's an absolutely essential step for anyone who is buying a home. If you don't do it, you can cost yourself thousands of dollars on your next mortgage.
Here's how it works.
Say, for example, that you find a mysterious American Express credit card account on your credit report. According to your credit report, the card has a $25,000 credit line and a balance of $20,000. There have also been multiple late payments on the account.
Problem is, it's not your card. You never applied for it. You've never used it. You've never even seen it. But it is making you look like a risky borrower because it makes it appear that you are a deadbeat and that you're using a high percentage of your debt
($20,000 of $25,000, or 75%). The ideal debt-to-credit
-limit percentage is 30% or less.
A case such as this one -- an extreme, but hardly unheard-of example -- can cause your credit score
to fall significantly. But it doesn't necessarily take a huge mistake to have a big impact. For example, a maxed-out card can lower your FICO score
by up to 45 points. A 30-day-late payment can cost you 110 points on your score. (That's according to information released by FICO.)
For about 5% of those in the survey, the removal of the disputed information improved their credit score enough to make them likely to get a lower interest rate than they would have otherwise. That could mean
that up to 10 million Americans have errors on their credit reports that could be the difference between fair credit
and good credit -- or even good credit and great credit.
- A 4% interest rate on a 30-year, $200,000 mortgage leaves you with a monthly principal and interest payment of $955.
- Bump the interest rate up just 1 percentage point to 5% and your monthly payment is $1,074. That's a $119 monthly increase -- or more than $1,400 per year.
- Bump the rate up to 6% and the rate jumps another $125 per month.
That can make it that much tougher to turn a profit
on your rental property, for example. It could put
property out of your price range. It even keep you from getting a loan
altogether. After all, the riskier you look, the less likely you are to get a loan.
The Investing Answer: Before you make any major purchase that will require a loan, avoid making any significant credit card purchases for about 30 to 60 days. Don't apply for new or increased credit and definitely do not miss any payments. Any of those things can put a temporary-but-real ding on your credit score.
Then, visit AnnualCreditReport.com and get your credit reports from all three major reporting bureaus. As I said, make sure your reports are accurate and if they're not, take it upon yourself to dispute them. And when you do dispute them, make copies of all your information and take careful notes of who you speak with at the bureaus and when you spoke with them.
Finally, go to myFICO.com
and purchase your credit scores
from all three bureaus. FICO's scores aren't free -- unlike some other credit scores
that are available -- but the vast majority of lenders
use FICO scores to make their lending decisions. Thus, when getting a credit score, you should get it from FICO.
The truth of the matter is that no one cares more about your credit than you. If you don't take care of it, it will cost you.