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Tom Kelly
Tom Kelly
The Real Estate Adviser

April 16, 1998

Getting your credit history in good order

By TOM KELLY
The Real Estate Advisor

One of the best steps you can take to speed up your loan approval -- and step up your credibility with your lender -- is to clean up your credit history long before you make formal application.

Some recent news added fuel to this fire, whether you are buying a new home or refinancing to a lower interest rate. Instead of doing just research, there's a good chance you will also have to do some damage control.

In a recent test by the United States Public Interest Research Group, a non- profit consumer group, 29 percent of the reports studied had serious errors, including false delinquencies and closed accounts listed as open.

Before you approach a lender for what may be the biggest loan of your life, get a copy of your credit report by calling each of the major credit bureaus (Equifax 1-800-685-1111, Experian 1-800-397-3742 and Trans Union 1-800-888-4213) and then report any inaccuracies in writing.

A credit agency has 30 business days to reinvestigate any contested blemish on your credit report and then contact you with the findings. If the credit bureau cannot verify the delinquency in question, the delinquency must be removed.

The 30-day time lines gets agencies and bureaus to clean up their files and speed up processing. It is required that the credit-reporting agency contact the creditor within five days to verify the debt.

When a lender contacts a credit agency for a basic report, it usually contains information from three major bureaus. There's a difference between a credit agency and a credit bureau. Bureaus collect data from banks, court records, department stores, etc.

Agencies research what is in the bureau and report the findings.

What is relatively new to the banking industry is the controversial use of FICO scoring. Your FICO credit score is a mysterious number that frequently determines whether -- and at what interest rate -- you qualify for a home mortgage. It was designed by San Rafael, Calif.-based Fair, Isaac and Co. Inc. (FICO).

A high FICO score means lower risk to the lender and can open the door to a quicker loan decision and possibly a lower rate. A low score can trigger outright rejection of an application by some lenders or a move toward a higher interest rate.

"But consumers need to know FICO scoring is not a pass-fail exam," said Washington Mutual's Bud Brummel. "It is just one way of gauging the borrower's ability to repay. We are so flexible now that we are making some loans that we certainly would not have even looked at two years ago."

The FICO dilemma is that most consumers -- and lenders -- have no exact answer about how best to prepare. The three-digit scores are composed of a multitude of credit and spending habits that many consumers do not even consider important.

For example, some lenders say its probably better to have several credit cards with low balances than to have one that's always bumping the maximum.

Earlier this year, Fair, Isaac and Co. said it was changing the way it factors in credit-check "inquiries" on credit-bureau files to compute credit scores. Curiously, the company has never publicly revealed technical details about how its statistical models work.

But take heart . . . Freddie Mac, one of the major players in secondary mortgage market, urges lenders to "look beyond" raw FICO scores to ferret out and correct potentially unfair, bad data on any applicant. According to Jim Gregerson, manager of Washington Mutual's Home Loan Center in Silverdale, the FICO score is just one piece of the puzzle.

"FICO scoring is more important in consumer lending, but it is one piece of information always considered in mortgage lending, too," said Regina Colestock, manager of Seafirst Bank's affordable housing division. "A lender is going to want to know how much money you have in the bank, how long you have been employed and whether or not you pay your bills on time."

If an incorrect item appears on a credit report, it's up to the consumer to see that it is corrected. For example, I once had two mortgages with the same lender. Both payments were once credited to one account, and I got a delinquency notice on the other. It took two letters and numerous phone calls to get the 30-day delinquency removed from my credit report.

Merely telling the agency is not enough. You should submit the explanation or proof in writing. People often don't understand that a credit agency cannot remove something from a credit report without the authorization of the company filing the delinquency.

Delinquencies include tax liens, judgments and repossessions.

And, when in doubt, be nice yet firm. A company's willingness to delete a past mistake or credit delinquency often depends on who answers your letter or call. Many credit reps have heard a variety of excuses and explanations (because people try to say their bad credit isn't their fault) and are uncooperative. An innocent person can be looked on as a guilty party. The attitude seems to come with the territory.

If you done your research and gone the extra mile to remove inaccurate data and STILL have problems regarding your credit report, contact the consumer-protection division of the state attorney general's office (1-800-551-4636).



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