Homebuyers - Understand Your Credit Report

Many homebuyers put off meeting with a mortgage broker until the last possible minute. After all, nobody likes having the intimate details of their credit reviewed. The images in our heads are of pompous bankers making arrogant judgments about our worth as human beings. But the good news is that it's never been easier to find financing for your home, and most mortgage lenders are friendly and courteous. Keep in mind, they want your business - that's how they get paid. And besides, in today's economy, the likelihood is that your banker's credit isn't without a blemish either.

Still, you'll feel much better about approaching a lender when you know what's on your credit report. Viewing your credit report allows you to prepare explanations for any past transgressions, and also to dispute the veracity of any incorrect information. While accessing your credit report isn't always free like it used to be, it is easy and relatively inexpensive. There's no reason for you to put it off for even one more day.

What Are Credit Reports?

There are three major credit reporting agencies in the United States, Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.transunion.com). Each of these private companies compete with one another in the free market, selling your information to potential creditors, employers, landlords, and insurers. This means that you don't have just one credit report, but three.

Since the three major credit bureaus are business adversaries, they don't make a practice of sharing information. As a result, each of your three credit reports (and resulting credit scores) could be vastly different. Perhaps Experian has an old delinquent account that you actually paid, or maybe TransUnion doesn't have one of your credit cards on file. Including incorrect negative information or omitting correct positive information can lower your credit scores, so it's important that you know what's on your credit reports before applying for a mortgage.

What Are Credit Scores?

You probably haven't heard of the Fair Isaac Company, but I bet you've heard of its nickname, FICO. Fair Isaac is the company that developed the credit scoring software that each of the three major bureaus use to calculate your credit score.

FICO scores range from 300 to 850, and you're likely to have a different, possibly very different, score with each of the three agencies. This is because not only might they have different information, but Equifax, Experian, and TransUnion each use a different formula to determine your score. Some lenders subscribe to all three agencies, others just one or two. If you're lucky, your lender will only check the credit bureau with which you have the highest score, but it's a crap shoot.

How Can I View My Credit Reports and Credit Scores?

In the past, you were legally entitled to receive one free credit report from each of the three major bureaus each year. Congress took away that right in 1997, so be skeptical of any online ad you see promising a free credit report - there are always strings attached.

You can legitimately request a free credit report if you are denied credit, employment, or insurance. The company that declines you must supply written notice explaining, in brief, why you weren't approved. Photocopy this information and send it to the three credit agencies with a requests for free credit reports.

Alternatively, you can call 877-322-8228 or visit www.annualcreditreport.com. The most a credit agency can legally charge you for your report is $9.50. Viewing your credit score incurs an additional fee, usually around $6. There are third-party services on the web that can access your credit report and offer "estimate" credit scores. These services are usually pricier, but may be worth it if they offer credit monitoring.

Knowing what's on your credit report can be a big relief, and also save you a lot of money. If there are any errors on your report, you need to have them removed. Otherwise, you could end up paying a higher interest rate. Understanding your credit report should be the first step for any intelligent person in the market for a new home.