The Credit Report

You’ve always fancied yourself a savvy consumer. Ever since you divorced your deadbeat spouse three years ago and gave him the home, you’ve been smart with your money.

You regularly shift your credit card accounts to those that offer the lowest introductory rates. When you buy a car, you test-drive several makes before deciding.

And now you’re ready to buy your own condo. So you apply for a number of mortgages, looking for the best rate.

Congratulations. You’ve just done substantial damage to your credit rating.

Those acts--and a host of other factors that may seem completely benign--are considered reliable and valid indicators of increased credit risk.

Although most consumers understand how to apply for credit cards, store accounts and even home mortgages, very few of us are aware of the factors lenders consider when they decide to loan us money in the first place.

No lender wants the headache of foreclosure or legal action to get back its money so elaborate record-keeping and numerical scoring models have been designed to maximize the chance that borrowers will repay their loans.

So what can a person who’s thinking about buying a house soon do to maximize her or his chance of qualifying for a mortgage? Virtually nothing.

That’s because the time to try to straighten out your credit is at least one year before the home-buying bug bites.

Lenders are not only looking for people who make timely payments on their existing loans, they also want to see that any late payments occurred long ago.

Ordering a copy of your credit report a few weeks before you’re about to make an offer on a home leaves you no opportunity to either improve your payment history or challenge false statements that may appear there.

Though few people look forward to getting a copy of their credit report, it’s an essential step for anyone who wants to borrow money.

Your credit history is held by three companies: Experian (the new name for TRW), Trans-Union and Equifax. Though much of the information may be duplicative, each company may also hold records the others don’t have.

What to Expect

Here’s what you’ll see on your credit report:

* Your name, address (past and present), date of birth and social security number.

* A listing of all known loans, bank card, gasoline and department store credit and charge card accounts.

* Your credit limit on each account, and your current balance for that account.

* Your payment history: how often you’ve paid any account after the due date and how late the payment was, during the last seven years.

* Any bankruptcies, financial judgments or liens against you (bankruptcies remain on your record for seven or 10 years, depending on the type).

* A list of who has asked for a copy of your credit report.

Reading your credit report (which you can obtain for $8, or free if you’ve recently been denied a loan or credit card) is straightforward.

Experian’s, for example, plainly lists each inquiry, account and payment history, indicating in a decipherable code which months the payment was received late and by how many days.

At the end of the report is a form that can be used to correct inaccurate payment information, whether that be a late charge that was actually on time, an account that you no longer have or one that you’ve paid off.

30-Day Response Time

Credit-reporting agencies will respond to your information within 30 days. If the creditor fails to answer the credit agency’s query within that period, the negative mark is automatically removed.

And if the creditor argues that the negative payment information is indeed accurate, then the consumer can appeal, offering proof that it’s fallacious. If that appeal is rejected, then the consumer has the right to add a 100-word statement to the report explaining why a particular item occurred or why it is incorrect.

However, when you apply for a home mortgage, the lender typically isn’t going to wade through all this information from each of the three credit bureaus. Rather, they’ll often ask for a “residential mortgage credit report” from a middleman, such as Van Nuys-based Credit Service Co.

This report will summarize the information from the three agencies and provide one more key piece of information: your FICO score, a numerical index of how likely you are to pay back the loan.

An acronym for Fair, Isaac Co., (the San Rafael-based company that created the scoring models), this score has become an important tool in the credit-granting business.

Scores range from 365 to 950, according to Sally Taylor-Shoff, business manager for Fair, Isaac. Though the company creates the criteria upon which the score is based, it’s Experian, Trans Union or Equifax that generates the number.

The FICO score is not provided to consumers, because the credit agencies argue that knowing one’s score does not help you improve it.

“We don’t show consumers everything,” acknowledged Maxine Sweet, Experian’s vice president of consumer education.

“A score is just an automated way of thinking about the data. It’s the factors that make a score that are important for a consumer to know,” she said.

“It won’t help a borrower to see hundreds of pages of scoring algorithms,” Taylor-Shoff said.

FICO scores can often be obtained, however, from a lender or mortgage broker. Residential Credit Co.’s mortgage credit report, for instance, lists FICO scores along with the top four reasons, such as “current balances on accounts” or “number of accounts delinquent,” that indicate why the score was not higher.

According to Residential Credit’s manager, John Fish, a score of 680 or above is a “very good” mark. Freddie Mac analyzed 25,000 FHA loans and learned that, of those who had a FICO score above 660, only 1% were 60 days or more delinquent on a loan payment, compared to 35% of those who had a FICO score of 620 or less.

Steps to Take Now

If you intend to buy a house in the next year or two, here’s what the industry says you should do now to maximize your chances of getting a mortgage:

* Pay all your bills on time, even if it’s just the minimum due. If you have a delinquent account, paying the balance will improve your credit rating.

“Making on-time payments is the most predictive factor for getting credit,” says Taylor-Shoff.

* Don’t “max out” your credit-card balances. Lenders will look unfavorably upon someone who is already up to his or her eyeballs in debt.

Lenders are also leery of someone who has too much credit available, either in the form of high credit limits or too many cards. Even if the credit is not being used, credit agencies assume it could be in the future.

* Avoid tax liens and bankruptcy filings. They’re strong indicators of your inability to manage finances.

* Check your credit report at least once each year to make sure that it is accurate and complete. As credit card debt and account delinquencies continue to grow, lenders will do whatever they think is appropriate to weed out the individuals who, according to their scoring criteria, are statistically less likely to pay their debts.

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Where to Call to Order Your Credit Report

Experian:

(888) EXPERIAN

Trans Union:

(800) 916-8800

Equifax:

(800) 685-1111