Are you planning to buy a home this year? Or maybe buy a car? Whatever it is that you want to purchase requires you to be concerned about your credit report, as long as it will involve a loan application.
Before a lender approves of your loan application, you need to go through a credit check. This is when they look at your credit report to compute your credit score. The whole purpose is to know if you are credit worthy or not. For instance, according to the latest mortgage law provisions published on ConsumerFinance.gov, one of the financial information that lenders should look into is the credit history of the borrower. This is to filter out the borrowers who has a high probability of not paying back their mortgage loan.
The credit check will help lenders determine if you can be trusted with a loan. In case you have a not so favorable credit report, that does not necessarily mean you will be disapproved immediately. The lender will try to protect themselves by imposing a high interest on your loan. While that will still get you the finances you applied for, it will cost you more money because of the interest.
5 steps to make credit inquiries work to your advantage
In case you applied for a loan or a new credit account, you may want to make sure that you will pass the credit inquiry that you will be subjected to. This way, you can make assumptions as to whether you will be approved of the loan or not.
So before they conduct a credit check on you, make sure you go through these 5 steps.
Step 1: Check your own credit report. The major credit bureaus will ask you to pay for a copy of your credit report but they are also mandated to give you one free copy every year. If you want to access them, you can go to AnnualCreditReport.com to download your free copy. Ideally, you want to do this a few months before you actually file your loan application. That way, you can read your credit report before the lender get access to it.
Step 2: See if there are errors and file a dispute against it. This is the reason why you want to get your report a few months before your application. In case there are errors, you can have it disputed so the credit bureaus can change it. A study done by the Federal Trade Commission revealed that one out of five consumers have reported that they found errors in their credit report. According to the study shown on the FTC.gov, this could have led them to pay more on loans due to a higher interest rate. In case you find out that you need to dispute an entry on your report, you should send a letter to the credit bureau involved. Send a copy of the document proving that the entry is wrong too. Once sent, you have to wait for them to respond, investigate and take action. That action may be to prove that their records are correct or to revise your report as per your data. If you are proven to be correct, they should send you a free copy of your credit report that contains the right information.
Step 3: Calculate your credit score. The second step is to check your credit score. You may want to calculate it to know how you will fare in your loan application. This is the grading system that will allow the lender to determine your interest rate. If it is high, then you are considered to be a low risk borrower. That will keep your interest rate low because your lenders will not feel the need to protect themselves from the possibility of you failing to pay for your debts. Your score will help you determine how much you need to improve to get the rate that is most affordable to you.
Step 4: Send bigger payments towards your debts. The next part of your credit check is to pay off your debts significantly. If you followed our suggestion to check your report a few months before the loan application, you should have some time to make significant contributions towards your debts. Timely payments and a lower debt balance will help improve your credit report so it looks more appealing to lenders.
Step 5: Make sure there are no unauthorized charges or new accounts/inquiries. Since you are already holding your credit report, you may want to double check for any unauthorized or suspicious entries that could show that you are a victim of identity theft. You want to report this as soon as possible to keep them from stealing your money.
By doing your own credit check before the lender, you are giving yourself the chance to improve your credit score. That is a great way for you to prepare for your upcoming loan.
Who checks your credit report
Apart from lenders, there are also other people or organizations who are interested in your credit report. This is why credit scores have become king. If you will be transacting with any of them, you may want to conduct a credit check on yourself too.
Creditors. If you will open a new credit card account, these companies will check your credit report before approving your application.
Landlords/property owners. If you will be leasing a home or any property, the owner or landlord will naturally want to know your payment behavior. That will tell them how well you can be expected to pay them rent every month.
Insurance companies. This also involves a regular payment scheme so it is but natural for them to want to check out your payment behavior. In case your credit score is low, you can expect that they will give you higher premiums.
Utility companies. They will also do a credit check on you to see how well you will pay. Most of the time, this check is done in order for them to determine if deposit is needed from you or not. If your credit report is unfavorable, then you can expect to be asked to put down a deposit.
Collection agencies. This is simply to determine if you are financially hard-up as you claimed you are.
Employers. Although you are not paying your employer, the credit report will say a lot about your character. It will help them assume how responsible, organized and disciplined you are when it comes to your finances.
Government agencies. They require this from you in case you are asking for some assistance – especially when it comes to finances. It is usually to check your eligibility. Sometimes, it is reviewed for national security purposes.
Court. These include judgement creditors or bankruptcy courts. They use this as part of the documents to help decide on your case – or to see if creditors or collectors should start collecting from you.
Anyone who has a court order to get your credit report can also acquire it. Apart from that, no one can access your report.
When is the best time to look at your credit report
Apart from borrowing money, there are also other instances wherein you have to do a credit check on yourself. What you don’t know about your credit score can hurt you so it pays to take a look at it every now and then. Here are the instances when you have to look at your credit report.
Three times a year. This is your regular check ups to look for errors or any unauthorized activity on your report. You don’t really have to pay for anything because you get one free report from each of the major credit bureaus (TransUnion, Equifax, Experian) every year. You can download it from the Annual Credit Report website.
After a credit disapproval. When you are declined of any application, you may want to view your report to see why you are not approved. That way, you can ask them to reconsider in case the reason for the disapproval is wrong.
Possible identity theft. You also want to check it if your credit card or information is stolen and you think you are in danger of identity theft. This is your way to monitor if they are using your details already.
Credit repair. You also want to check your report, obviously, if you want to improve your credit score. You need to look at your current situation to figure out the improvement that needs to be made.
In case you find out that your credit score is low, here is a video from National Debt Relief that will reveal the fastest way you can increase your score.
Diana hates debt just as much as you do. She is a finance writer for National Debt Relief. She aims to provide the best information to win the battle against debt.