Borrowing money is painful enough without paying more than you should because of an error in your credit report. With the shockingly high number of credit reporting errors, do you know if your credit report is ready for prime time?
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.
It's even possible that a majority of credit reports include inaccurate information, according to a U.S. Public Interest Research Group (U.S. PIRG) study.
Even if an error on your credit report doesn't get your mortgage application denied altogether, it could cause the lender to mistakenly charge you extra fees or increase your mortgage rate. Today's 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:
Credit report error #1: Mistakes in reporting balance owed
You've paid off an account or even closed it, but your credit report still shows a balance owed. Typically, this mistake is the result of the creditor not reporting to the credit bureau that the account has been paid in full.
The impact of such an error on your credit score depends on the account balance shown. Credit utilization, meaning the percentage of available credit being used, makes up 30 percent of your FICO score. If you have $6,000 of available credit and actually use $1,500, your ratio is 25 percent. However, if your credit report erroneously indicates that you're using $4,500, your utilization increases to 75 percent. That will almost certainly take some points off your score.
Credit report error #2: False reports of collections activity
Sometimes, credit reports show collection accounts when in fact no collection activity exists, or when collections have been paid off.
This mistake is the result of the buying and selling of charged-off debt to collectors. In the past, that $10 check that you drunkenly bounced in your college fraternity days dropped off your credit history not long after graduation. Today, companies specialize in buying these old accounts for pennies on the dollar, then run credit checks to see who's most likely to pay up when shaken down. (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 are another common source of reporting errors. A medical practice may mistakenly send your account to collections, where it gets reported on your credit even after your insurance company pays the bill.
Credit report error #3: Black marks that remain past their expiration date
According to the U.S. Federal Trade Commission (FTC), the Fair Credit Reporting Act requires even correctly-reported derogatory items to be dropped from your report eventually. In most cases this should occur within seven years (the exception is Chapter 7 bankruptcies, which have a 10-year limit). Reports of unpaid 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, and you don't pay what the court orders, it will remain on your credit report for a very long time. Ohio's statute of limitations, for example, is 15 years.
Generally, the clock starts on the date that the event took place. Good news: 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 #4: Negative activity falsely attributed to you
Accounts not opened by you and derogatory information not belonging to you may be a result of identity theft.
Of course, this kind of credit report error isn't always attributable to identity theft. People living in the same area with similar names may get their credit reports tangled up. That's because credit data is not always cross-referenced by a Social Security number or other unique identifiers.
Credit report error #5: Holes in your credit history
Credit reports can be missing major credit, personal loan, mortgage or other consumer accounts that demonstrate your creditworthiness.
A credit report that understates your credit repayment history can keep your score down and cost you money. This matters most when you have a limited credit history, and every account counts.
How much these errors can cost you
Imagine your credit report's mistakes drop your credit score by 50 points, which could happen in the event of a new collection account or a very high credit utilization ratio. How much does it matter when you apply for a mortgage if 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, that's an extra $6,750 for someone else's mistakes.
What if the difference in your score is only one point? That 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 1 percentage point more in fees.
Yes, that's right: $3,000 for one lousy credit score point.
Here's what you can do about it
Your first step when buying or refinancing a home should be getting your credit report and credit scores from all three credit bureaus so mistakes can be corrected, erroneous information deleted and omissions added. Take advantage of the free credit reports available each year from AnnualCreditReport.com. The FTC's website offers step-by-step instructions on disputing what's in your credit report from the three major companies.
However, updates can take weeks to show up, and you may be in a situation where it's too late to wait that long. Mortgage lenders (and only lenders) have access to rapid rescorers. For a fee (about $30 to $50 per tradeline), this service can correct inaccurate data on your credit report in about 48 hours--in time to get your mortgage closed.
Rapid rescorers can't do anything about bad credit that's correctly reported, but they can delete an inaccurate credit history. For the best results, you must supply written evidence 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.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte. She graduated with High Distinction from the University of Nevada with a BS in Financial Management.