Repair Your Credit Before Applying for a Home Loan

Credit repair isn’t easy, but you can do it yourself

The process of applying for a home loan is a complicated one, and there are many steps involved. At some point, the lender is going to want to see a copy of the borrower’s credit report in order to determine if the borrower is worthy of the loan. Your credit report is a record of every major financial transaction you have ever had. On it you will find a list of bankruptcies, judgments, installment loans, credit card or other revolving accounts, and other significant financial debts or obligations. The credit bureau that provides the report to the lender will also provide a copy of your credit score, a number between 300 and 850 that represents your overall worthiness in the loan market. That score, also known as a FICO score, is a distillation of your entire financial history and your ability to obtain financing for anything today, tomorrow or next year depends upon having a healthy credit score. What if your credit record or financial history is poor? Can credit be fixed? What about those companies that promise credit repair?    

Can they help?

The notion of credit repair is a frequently advertised myth. No one can “fix” your credit overnight, whether you pay them or not. Any company that promises you otherwise is simply after your money. Your credit record is maintained by Trans Union, Experian, and Equifax, three separate companies that each keep accurate records of your financial dealings. There is no magic way to change the information these companies have on file for you. That’s the bad news. The good news is that you can repair your record yourself. It just takes time and diligence.

The primary thing that you can do to repair your record is to start, today, to pay your bills and to pay them on time. One third of the FICO score is devoted to your payment history; that is, whether or not you have a history of paying your bills in full and on time. If you frequently pay late or if you have defaulted on loans, this will weigh heavily on your FICO figure. The only way to raise that number is to establish that you are capable of repaying loans promptly. It may take a year or two to do this, but in time, you will have additional credit options available to you. 

The second third of your score is determined by the ratio of outstanding debt to available credit. If you have five credit cards with $10,000 in limits and they are all at their limits, you have a debt ratio problem. The only way to repair that problem is to pay down your balances. You don’t have to pay them down completely, but you must substantially reduce the amount you owe. Should you pay off a credit card balance, do not cancel the account. Just stop using the card so that your debt ratio doesn’t increase again.

As you pay off your debts, check your credit report for errors or fraudulent activity, such as identity theft. You can obtain a credit report for free three times a year; you should do so. It isn’t easy fixing your credit record. It takes time and determination, but it can be done and it is worth the effort if you want to buy a home.