How to Clean Up Your Credit Report

If you are worried about your credit history, you can take chargeof your situation by getting the facts and taking the actions necessaryto improve your chances for a mortgage approval. Many consumers have faceddifficulties that resulted in credit problems. The good news is that a consumeris no longer banned for life from obtaining a mortgage or other new credit.

The primary purpose of a credit report is to establish that a borrowerhas a sufficient and satisfactory credit history for the loan requested.The secondary purpose is to develop a complete summary of current debtsthat a consumer must pay each month. Credit reports also list any bankruptcies,foreclosures and legal judgments against a consumer.

When applying for a mortgage loan, there are specific guidelines establishedby mortgage institutions such as Federal National Mortgage Association (FNMA)for obtaining a conventional mortgage loan. These guidelines specify, "Theborrower's credit history should demonstrate his or he past willingnessand ability to meet credit obligations that will show the borrower's commitmentto making payments on the new mortgage being considered."

Underwriters are more concerned about a borrower's overall pattern ofmaking payments than they are about a few individual occurrences. "Aborrower who has made payments on outstanding or previous credit obligationsaccording to the contractual terms will have a credit history that consistsof no late payments and no adverse or derogatory information (such as bankruptcies,judgments or collections). To make sure that a borrower who has an otherwisegood payment history is not penalized for an occasional late payment, wedo not require perfect or spotless credit records."

While usually accurate, credit reports often contain errors and mistakes.In the past, credit histories were a closely guarded secret and consumerscould only guess if they were denied credit by accident or due to incorrectinformation. Today, consumers can obtain exact copies of their credit historiesfrom the major credit reporting bureaus.

Whenever consumers are denied credit , they can obtain a copy of theircredit report to challenge and correct any errors or mistakes. For instance,if a borrower has a common surname or family members are Jr., Sr., III etc.,he or she will be able to separate the accounts from family members or peoplenot even related to the consumer.

A borrower should contact all three of the major credit bureaus directlyto correct any errors appearing on reports from each of those credit bureaus.Each credit organization will send you a free copy if you have been deniedcredit. Otherwise a small charge may apply. You can contact each creditbureau as follows: TRW (800) 682-7654; Trans Union /Credit Bureau of CT(203) 931-2035; Equifax (800) 685-1111.

A borrower preparing to apply for a mortgage loan should take severalsteps to maximize chances of approval and prevent unnecessary delays. First,list all current debts, including monthly payments, total balance and typeof loan (installment, revolving etc.) to determine what should appear onthe credit report.

Second, get the facts. Contact all three credit bureaus listed abovefor a copy of each separate credit report. Each bureau will send a copyof the credit report, but the inquiry will not show up on the credit reportas an inquiry because it was for the consumer. Each report will includea dispute form to challenge any incorrect information. Complete the disputeform for any items with which there is a disagreement and send it to eachcredit bureau.

When credit reports have been obtained review the monthly payment historyfor each account. As long as the majority of a borrower's credit demonstratesa satisfactory credit history, a few minor delinquencies should not preventapproval for a mortgage, car loan or credit card. However, consumers shouldtake three steps to insure that their credit report is reviewed in the mostfavorable light possible:

1. All credit delinquencies, no matter how minor, should be explainedin a satisfactory manner to the lender. For delinquencies over two yearsold, the explanations can be brief. For credit delinquencies in the pasttwo years, the explanations must be detailed as they may affect loan approval.

2. All credit inquiries (by other grantors of credit) that appear ona credit report should be explained by stating the purpose of the creditrequest, whether credit was granted or not, and the current terms. A largenumber of inquiries on a credit report reflects negatively because it appearsto the lender that the borrower has applied to other institutions withoutsuccess.

3. All charge-offs, liens and unpaid judgments, no matter how small,must be paid and shown as paid on all credit reports prior to obtaininga loan approval.

If the payment history still reflects many late payments in the pasttwelve months, a consumer may need to consider making on-time payments forat least twelve months before applying for a mortgage loan. As an alternative,there are now loan programs available that can assist borrowers who havehad credit difficulties. These programs allow borrowers to make down paymentsas low as 15% and obtain a loan immediately. These loans carry higher interestrates because of the higher risk. However, if a borrower can maintain excellentcredit for twelve to twenty four months with the new mortgage, he or shecan refinance the loan into lower rates later.

Over the past several years, several companies have sprouted up claimingto be able to "repair" consumer credit reports. "Repair"is a euphemism for "alter" with these organizations, which attemptto use loopholes in the Fair Credit Reporting Act to bully creditors andcredit bureaus into changing correct information. Consumers should be awarethat the Federal Trade Commission announced recently that "there areno legitimate credit repair organizations in the United States."

In fact, all consumers now have the direct access, procedures and legalrights to analyze, dispute and correct their credit histories. For consumerslooking to obtain credit of any kind in the future, it pays to start preparingnow.