Last time we had a long talk about the public record and how you can deal with public record items on your credit report. You’re armed to handle things like bankruptcies and judgments, but not everyone actually has to deal with those. These are extreme results of issues in the other main part of your credit report — so Part 2 of this series is all about how to deal with the non-public record problems you might encounter while you’re trying to get a mortgage.
Fixing Basic Issues with Your Credit Report
If you’re looking into landing a mortgage, you’re probably already familiar with the concept of a credit file. But for those who aren’t, I will explain. Your credit file is semi-permanent record of everything you do that has to do with borrowing money or repaying it. Things like credit cards, student loans and even overdraft protection lines can report to your credit. They don’t always, but for the purpose of this article, that doesn’t really matter.
What you’re going to find there is a complete record of your payments with each company you owe money to, as well as any of your attempts to secure credit and notes on collection efforts if you’ve been unable to pay someone back. It’s a very thorough report — that’s why banks rely on it to help them determine how prepared you are to pay off a house.
Your credit score is one of the most important parts of this report, but it’s not the only thing lenders will look at. They want to be sure that you’re not going to default on your debt, so they comb your records with a fine-tooth comb. It can be very stressful, it feels invasive, but it’s the way the industry works. I’m sorry about that, but I’m going to do everything I can to prepare you for it. Let’s get started.
Credit File Fixes
There will undoubtedly be some of you who come up with scenarios and items not touched on in this article, but it’s meant to cover the more common problems you’ll see. If you have something unusual pop up, by all means comment about it and we’ll see if we can figure out how to help you. Sometimes your best bet is to flee to Mexico, get a new identity and start over on a sandy beach in Cancun. I wrote this guide for less severe issues, like:
Late Pays. These are common problems, everybody has had a late pay at least once — they happen. The thing is to not make it a habit, that’s when you’re in trouble. Strictly speaking, late pays take seven years to drop off your credit report, but the older they are and the fewer in a row, the better.
So, let’s say you were in a car accident in 2012 and weren’t able to pay your credit card bills in November and December. That’s not awesome, but provided you caught the missed payments up, it’s not going to be that big of a deal — that black mark won’t follow you for life.
The thing you must understand is that your credit file is never going to be blemish-free if you live a remotely normal life. It just won’t. You get busy, you forget, you pay a payment late. Or a computer error happens. Big deal. Let those go. Do not stress over this stuff, it won’t be perfect.
Late pays are no big deal once in awhile, but you’re in real trouble when you have multiple late pays that are 90+ days old. This is very bad for you and your credit. There are no two ways about it. The good news is that the longer ago extreme lates like this are, the better your lender will feel about them. If you just forgot to pay a bunch of bills for months and months this year and go to apply for a mortgage, you may be denied — you’re risky business. The best cure for these is time, provided they’re an accurate telling of your credit history.
The good news is that you can dispute late pays if you’re certain they’re inaccurate. You can dispute just about anything on your credit report, in fact, but it will take time for the credit bureaus to research the issue. This isn’t a quick fix, but if you’re working on your credit file today for a mortgage next year, disputes will clear up obvious inaccuracies.
Otherwise, time is your best friend. In rare cases you can ask your creditor for a Goodwill Letter that essentially erases your late pays. That car accident in 2012 is a good example of when these stand a chance of being an option. If you were just forgetful or you didn’t have the money to pay your bills your creditor won’t show you mercy.
Collections. Oh boy. If you’ve got collections on your credit report, you’ve had some problems financially — you got in over your head, bad things happened to you and you couldn’t fulfill your obligations, something was not great. Collections are sort of a double-whammy. Not only do you get dinged for having a major series of late pays, but the collection itself is also a really bad scar on your credit report. The good news is that collections aren’t forever — even if you never pay them, most will drop off after seven years.
Some, like medical debt, are being mostly ignored these days. FICO 9 scoring systems will be giving you a break if all your debt is medical — and many banks will still consider you a fairly good risk if medical debt is all you have. I think it’s because even bankers recognize the huge problem we have in America with runaway medical costs at the same time that our insurance companies are increasingly refusing to pay claims. But, I digress. Just know I feel you — I have medical debt and lenders tend to ignore it. Pay your doctors, but if you can’t, don’t think it’s the end of the world for your credit, OK?
Unless your lender asks you to repay a collection account, don’t. That’s my advice. Let a sleeping dog lie. If you make an new agreement with the collection agency and then miss a payment or can’t make good after all, you start all over again with another bunch of black marks. Let it go. If you want to pay collections in full, that’s fine — that’s your business — but make sure that you get a letter from the collection agency that says that your debt is satisfied. That way if the collection agents decide to continue to report the debt, you can prove to the credit bureaus that you took care of the account. Once in awhile you can negotiate to have your paid in full collection removed from your credit file, but most agencies are hesitant to give this a green light.
The bad news is that as long as that collection appears on your credit file, it doesn’t matter if it’s paid or not. It shows up the same and affects your credit score the same. Your lender may reject you for having it, he may ignore it, or he may ask you to pay it at or before closing. If you’re getting ready for a mortgage, put money aside to pay your collection, but wait until your lender decides what to do with it to make a move.
High Revolving Balances. Finally, a simple one. Whew. If your lender says you have high revolving balances, this isn’t because they believe you have too much debt for your income — that’s another issue entirely. This is all about over-utilizing your credit accounts. It happens when all your credit is maxed out or you’ve been closing accounts with zero balances in an effort to increase your credit score.
The truth, my friends, is that having open credit accounts with no balance is actually an ideal situation for building a ridiculously high credit score. People with no credit accounts don’t have good credit scores for one reason: they have no credit utilization behavior to track how responsible they are with credit. So, if you have zero balance credit cards that aren’t hurting anything, whatever you do, leave them alone.
If you have high revolving balances, there are really only two ways to fix this. Either pay something down to bring the amount of credit you’re using to a total of 30 to 50 percent of your total credit limit or get more credit. Crazy, I know. Open another credit card and don’t touch it, or ask for a credit limit increase on your existing credit cards to clear up an issue with high revolving balances.
There’s a lot of debate about the value of maintaining a zero balance on a credit card (the old “use it and pay it off right” away trick), and I have to say, I think this is the worst strategy for establishing a strong credit track record. Turns out, Credit Karma agrees with me. In my mind, pay in full on credit cards is no better than never using them. Instead of doing that, pay off a small balance over a long period so lenders know you can be trusted with their money.
Student loan defaults. Student loans, like back taxes, will follow you until you die (or are permanently disabled). If your loan is defaulted, now is the time to get it back on track. I know, I know…you had no choice but to default, things weren’t going well for you financially and so forth. I understand. I’ve managed to keep mine out of default, but it’s been close a few times.
The government also understands, so if we’re talking about a defaulted Direct, FFEL or Perkins loan there’s a process in place that will make it super easy to fix this thing. If your defaulted loan is a private sector student loan, you’ll have to speak to your lender about your situation. They’d still rather your loan was being paid than not, so they will offer you some sort of way to rehabilitate it.
I know several people who are terrified of making contact because the payments they had that made them go into default to begin with were horrific. One person said her loan payment was over $1,000 a month (she lives in Ohio — that’s a bundle there). The good news is that you’re not likely to be saddled with the same payment that got you into trouble if you rehabilitate your loan. Instead, you’ll be asked for detailed financial information and the government will assign you a payment that’s equal to 15 percent of your discretionary income.
This new payment might feel like a lot at first, but after nine on-time payments, you’ll be eligible to apply for an income-driven repayment plan and your loan will be taken out of default status. If you have multiple loans (defaulted or not), there’s no question that you need to consolidate them (seriously, click that — we’ll wait). Not only will it bundle all your loans into one chunk, it’ll allow for a longer repayment time and better repayment options. If you haven’t done it, do it. I’m not even joking. Do it now. Plenty of Americans are drowning in student loan payments because they don’t know this is a thing.
Errors in your credit report. You’d be shocked how many credit file errors happen. Sometimes it’s because you have a similar name to a relative (so their credit leaks into your file) or simply because people make mistakes when they input credit stuff, but there are enough errors out there that there’s a very easy process to repair them. If you notice something on your credit report that doesn’t seem right, here’s what to do:
Step 1: Order your credit reports through AnnualCreditReport.com. It’s free once a year and this tool makes it really easy to dispute credit file errors online. You can do it the old fashioned way with a letter, but reporting digitally can speed the process up.
Step 2: Use the AnnualCreditReport.com system to identify and report errors. Be specific with your reasons for disputing when possible, but if it’s simply an account that’s not yours you don’t have to get too detailed. “Not my account” will be sufficient.
Step 3: Wait patiently for your credit file to correct itself. If you’re not in a rush, check again in 90 days through MyFICO to see how things are going. If errors remain, you can use the MyFICO system to continue to dispute them.
If your lender intends to clean up your credit file, you can skip all that — he’ll take care of it. Just keep an eye on it and make sure things are moving forward at a decent clip.
The Bottom Line: Credit Report Issues Are Easy Fixes, But Not Always Quick
I know this credit report stuff can be really intimidating, but there’s nothing to be afraid of. This is the easy part, it’s all about either paying things down, waiting patiently for time to heal all credit wounds or disputing items that aren’t reporting right. Piece of cake, right? If your mortgage lender comes back with bad news because of any of these basic credit report problems, it’s no sweat. Just find the right section and do what I told you.
If you aren’t working with a lender yet, even better. Clean up this stuff before they see it. Go get your credit file at AnnualCreditReport.com and start today. There’s no better time. Onward to better credit and great mortgages!