Misinformation on your credit report, even if it drops your score by a single point, can cost you thousands. Especially when you apply for a home loan. That's because the most popular mortgage programs divide their applicants by credit score into different risk groups, and those divisions occur at 20-point intervals. So a borrower with a FICO ranging between 640 and 659, for example, pays higher fees than one whose FICO falls between 660 and 679.
An error causing your score to be 659 instead of 660 adds a surcharge of .5 percent to most loans backed by Fannie Mae and Freddie Mac. This is called a Loan Level Pricing Adjustment, and for a $300,000 home loan, that's a $1,500 cost you should not have to pay.
This doesn't just apply to mortgages. According to MyFICO, as of this writing, an applicant for a 60-month new car loan with a 689 FICO gets an average rate of 8.192 percent and pays $6,663 in interest over the life of the loan. But add one point to that score and the rate drops to 5.89 percent and costs $4,707 over five years -- a one-point mistake by a credit bureau could cost the borrower almost $2,000!
5 common credit report errors to look for
Government regulations entitle you to a free credit report every year from each if the three major bureaus -- Equifax, Experian and TransUnion. And for a small charge, you can also get your credit scores. The government's site, www.annualcreditreport.com, is the only one not linked to commercial enterprises. You won't have to sign up for monitoring services or allow them to sell your personal information to receive your report.
Understand that the "educational" scores you receive may not be exactly the same ones lenders use when they pull your credit -- there are many versions of the FICO score, and some are geared specifically toward mortgage, auto, or insurance industries. Before you complete a mortgage application, look for these top errors on your credit report:
1. Paid-off accounts showing balances
This can harm your score because it increases your utilization ratio -- the percent of available credit that you actually use. If you have $10,000 in available credit and owe $2,000, that's a respectable 20 percent ratio. But if your creditor reports that you still owe $5,000, that's a 50 percent ratio and could lower your score. Utilization makes up 35 percent of your FICO score, so this is a big deal.
2. "Zombie" debt and collection accounts
So-called "zombie" debt refers to old accounts or collections that may come back to haunt you years later. This can occur when a creditor (say, you bounced a check to the pizza joint back in college) writes off your account but sells the right to collect to another creditor -- perhaps for pennies on the dollar.
That creditor, in turn, may try to collect, sell it off to yet another collector, or just sit on it for a few years and try again when you have more money. These outfits pull periodic credit checks to see who's most likely to cave in to high-pressure tactics. (If you have excellent credit, you're a more likely target because companies hope you might pay up to keep it that way.)
3. Derogatory information that won't go away
Credit bureaus must, by law, remove credit blemishes from your history (and your score) within specific time periods. The Fair Credit Reporting Act requires that most derogatory items must be dropped from your report within seven years. (Chapter 7 bankruptcies are the exception, and can stay on for 10 years.)
If you lose a lawsuit and pay a judgment, the plaintiff is usually supposed to inform the court so that your public record can be cleared. If this doesn't happen, you'll have to prove that you've paid the debt and restore your good name.
4. Accounts that are not yours
Many consumers are surprised to discover that creditors and bureaus can identify activity as "yours" without your social security number. A partial match of name, address or social security number can get you linked to accounts you never even dreamed of. And that's not even counting intentional identity theft, in which schemers open accounts in your name, often without making the payments.
5. Incorrect payment history
A single late payment can drop your FICO score by 100 points if you currently have excellent credit. The effect is less if your credit is less-than-great. To qualify as "late," the payment must be at least 30 days past due. If you paid your bill on time, proving it and fixing that error can save you thousands. In fact, according to MyFICO, dropping your FICO from 760 to 660 adds about $40,000 to your loan costs over the life of your mortgage.
Even if you did pay late, if you have a good relationship with your creditor and a good payment history, you may be able to convince them to remove the damaging item. It can't hurt to ask.
The best way to dispute credit report errors
The biggest problem with credit report errors is that they proliferate so easily and can be difficult to clean up. For example, you send in your auto loan payment on time, but it gets mis-routed and isn't credited until 31 days after its due date. The next time your auto lender reports its credit history, your payment shows up as a 30-day late. Your score takes a hit in every bureau that receives this information.
Understand that you cannot just dispute credit report errors with the credit reporting companies. Because they might correct it, but the next time your creditor sends in its data, the incorrect information may pop right back into your report. And if the creditor sent the account to collections, it may show up more than once on the same report. If that collection was sold again, you could see the same derogatory note in several forms on the same report!
How to dispute credit report and win
The key to disputing bad credit data is to kill it at all levels -- the creditor reporting the original missed payment or default, any collection agencies involved, and all three major credit bureaus. It's like stomping out a fire -- you have to put out every ember to keep it from flaring up again.
And those old collections? Chances are they are no longer collectible if their statute of limitations has run out or the agency purchasing your account can't prove that you owe them anything. Don't restart that clock by contacting them. They have to be able to prove that you owe the money or the line item must be dropped from your report.
The FTC recommends that you follow these steps:
- Use the FTC's sample dispute letter to inform all three major credit bureaus that you are disputing the information. Include copies of documents proving your case, and send it by certified mail. The bureaus have to investigate the claim and drop the information within 30 days if it is inaccurate.
- Dispute the information with the original creditor that provided the inaccurate information. Here's a sample letter for that, also courtesy of the FTC. If you are in the right, the creditor must request that the information be updated by the credit bureaus.
The process may take some time, but what if you need the correction right away? For instance, what if you are in the process of applying for mortgage pre-approval and discover the wrong information on your report?
Mortgage: What happens when you dispute an item on your credit report?
When time is of the essence, mortgage lenders can help. That's because they have access to services that members of the general public don't. The services are known as rapid rescorers. For a fee (about $30 to $50 per tradeline), re-scorers can correct inaccurate data on your credit report in about 48 hours -- in plenty of time to re-price and re-underwrite your home loan to take advantage of today's mortgage rates.
Rapid-rescoring is not credit repair. It can't change bad credit history that's correctly reported and legally on your history. And there is no guarantee that removing a blemish will lift your score, at least not as much as you hope. But, rapid re-scorers can remove incorrect items, update balances, and fix identity theft issues.
For the best results, write a letter explaining, item by item, what's incorrect and why. Provide copies of anything you have proving your case -- like your bank statement showing a so-called "missed payment" clearing your account on-time. Without such documentation, some rescorers may contact the creditors directly, but it takes longer to sort things out, and that could delay a home purchase.
Protect yourself
Credit reporting errors are common. And sadly, massive data breaches and identity theft are big problems. Your best bet is to monitor your credit periodically, using your free credit report rights, purchasing a monitoring service, and keeping your private information private. Be aware of your rights, especially questions your mortgage lender can't ask and check your credit a few weeks before applying for a home loan or any major credit purchase.
