5 credit report errors that will cost you
If you haven't gotten around to pulling your credit reports and your credit scores in anticipation of a home loan application, here's a good reason to do it right now: credit reports often contain errors that can sink your mortgage application.
Study after study has uncovered a shockingly high number of credit reporting errors serious enough to affect consumers' credit applications. Are you sure that your credit report is ready for prime time?
Lower credit score = higher mortgage rates
Even if you're approved for a mortgage, a "material error" in your credit history could lower your FICO score and cause your lender to mistakenly over-charge you or increase your mortgage rate. Today, the majority of conventional (non-government) mortgage pricing is based on your credit score, and pricing changes occur at 20-point intervals. If scoring errors cause you to drop into a lower tier, you'll pay more for your home loan.
Here are five common credit report errors, and how they may affect the cost of your credit:
Credit report error No. 1: Paid-off accounts showing balances owed
You've paid off an account balance or even closed the account, but your creditor is still reporting a balance owed. If the creditor does not report the payoff to credit bureaus, the bureaus will continue to report that you have an unpaid obligation.
The impact of such an error on your credit score depends on the size of the balance shown. Credit utilization, meaning the percentage of available credit being used, comprises 30 percent of your FICO score. If you have $8,000 of available credit and actually use $2,000, your ratio is 25 percent. However, if your credit report wrongly indicates that you're using $6,000, your utilization increases to 75 percent.
Experts estimate the consequences of this error at 25 to 50 points off your score. A study from CreditKarma found that average FICO scores for those with 75 percent utilization averaged 37 points lower than those with 50 percent utilization.
Credit report error No. 2: Falsified reporting from debt collectors
Sometimes, credit reports show collection accounts when in fact there was never a collection, or when collection accounts were paid off.
This glitch can occur when creditors sell their charged-off debts to collection agencies. Before this practice became common, a silly $20 bounced check to your college pizza joint dropped off your credit history shortly after graduation. Today, however, collectors make a business of buying these old accounts for pennies on the dollar, and then they run credit checks to see who's most vulnerable to their high-pressure tactics. (Hint: if you have excellent credit, you're a more likely victim because companies know you'll pay up to keep your record clean.)
Medical bills often end up in collection agencies because they're usually unplanned, and because insurance payments can come slowly. In fact, the Consumer Financial Protection Bureau (CFPB) says that one out of every five credit reports contains medical debt collection activity. A medical practice may prematurely send your account to collections, and the agency might report the bill on your credit even after your insurance company has paid it.
Generally, the clock starts on the date that the debt was incurred. The good news is that when debts are sold and resold over time, the original documentation often disappears. If the collection agency can't prove that you owe the original amount, it has to remove the black mark from your account.
Credit report error No. 3: Old derogatory entries still being reported
According to the U.S. Federal Trade Commission (FTC), the Fair Credit Reporting Act requires that derogatory items must be dropped from your report eventually, usually within seven years. (Chapter 7 bankruptcies are the exception, and can stay on for 10 years.)
Reports of judgments against you can remain for up to seven years, or until the statute of limitations runs out, whichever is longer. (Note: this does not mean that anytime someone sues you it goes on your credit report. It means that if someone sues you and wins a judgment, that becomes a public record and stays on your history even after it's been satisfied.) When you pay the judgment, the plaintiff is usually responsible for informing the court. If the plaintiff does not do this, you'll have to update the court and the credit bureaus, proving that you've repaid the debt.
Credit report error No. 4: Negative activity falsely attributed to you
If accounts that are not yours start showing up on your credit history, you may be a victim of identity theft. Someone may have opened up accounts in your name, using your identifying information. You might not notice anything wrong until your credit score plummets from the unpaid bills.
Of course, this kind of credit report error isn't always caused by identity theft. People living in the same area with similar names can get their credit reports tangled up because credit bureaus don't require an exact Social Security number match to report data; just a partial match of the name, location and SSN.
Credit report error No. 5: Missing information
Credit reports may not contain all of your major credit card, personal loan, mortgage or other consumer accounts that validate your creditworthiness.
These errors of omission can keep your score down and cost you money. This matters most when you have a limited credit history, because so-called "thin files" tend to have lower FICO scores.
How much more are you paying?
Suppose that you're one of the 26 percent of American consumers with credit reporting errors. Suppose the errors drop your credit score by 50 points and your score is 670 instead of 720?
With Fannie Mae and Freddie Mac's risk-based pricing, a difference of 50 points is a big deal. With the lower score, you'll be charged 2.25 percentage points more in fees to take out a mortgage with 20 percent down. If your loan balance is $300,000, you'd pay an extra $6,750 for someone else's mistakes.
What if the difference in your score is only one point? That single missing point could make a huge difference if you're on the cusp of two credit score tiers. If your score goes from 680 to 679, you get charged an extra one percentage point in fees. That's a $3,000 hit for one lousy credit score point.
Here's what you can do about it
Get your credit report before buying or refinancing a home. You can get your free credit report (and pay a reasonable fee for your credit scores) from all three credit bureaus at www.annualcreditreport.com. Go through the reports carefully and dispute what's incorrect. The FTC's website offers step-by-step instructions on disputing your credit report.
However, if you need items to disappear quickly so you can complete a mortgage application, you can get assistance through your mortgage lender. Mortgage lenders (not members of the public) have access to rapid rescorers. For a fee (about $30 to $50 per tradeline), re-scorers can correct inaccurate data on your credit report in about 48 hours -- in time to get your mortgage closed.
Understand that rapid rescorers can't do anything about bad credit that's correctly reported, but they can remove an inaccurate credit item. For the best results, supply written documentation that the report is incorrect. Without such documentation, some rescorers will contact the creditors directly, but it takes longer to sort things out and rescore your report.
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