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Review Your Credit Report First Before Applying for a Loan

October 27, 2009 | Credit Reporting | No Comments
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If you are applying for a loan, obtaining a copy of your credit report is the first place you should start.  Your credit report more than likely is the first thing a potential creditor will look it.  Even if you pay your bills on time and have a good credit score you want to ensure that all the information in your credit report is accurate and up-to-date.

Studies have shown that many credit reports contain inaccurate information what could affect your credit rating and even cause your loan application to be rejected.  If you discover a problem, you can fix it before potential creditors access it.  

You can get a free copy of your credit report from AnnualCreditReport.com. You are entitled to 1 free credit report within a 12-month period from each of the three agencies.   This free credit report doesn’t show your score, but will show items listed on your credit report.  To get your score you will have to purchase your credit report from services such as Equifax.

Before applying for a loan, check your credit report for the following items:

Clerical Errors
Credit reports sometimes contain errors that are a result of clerical (human) error or a computer glitch.  These may include late payments, payments not credited, or data mixed in from a credit file of someone with your similar name.  

Excess Unused Credit

The fewer charge accounts you have the more attractive you are to a potential lender.  You may want to consider reducing the number of revolving charge accounts listed as active in your credit report.  Lenders sometimes view too many revolving debt as a negative when considering a loan application.

Inactive Accounts
If you have accounts you have stopped using, it’s a good idea to close these accounts if you don’t plan on ever using them.  When you close an account, make sure your creditor notes the account as “closed at consumer’s request”; otherwise, a potential lender might assume the creditor closed the account for other reasons.

Credit Card Accounts
Well managed credit cards may improve your chances of getting a loan at a good rate, especially a mortgage loan, where lenders use stricter qualifying guidelines.  It’s also advised to keep credit card balances around 75% of the available credit limit.  Ironically, credit cards with high credit limits are viewed as potential debt, while maxed-out cards make consumers less desirable credit risk.  Both of these scenarios could limit your ability to get a loan.

30-day and 60-day Late Payments
If your credit report contain a couple 30-day late payments entries that are accurate, lender may over look the occasional late payment if you explain the situation and your credit score is good.  Try to avoid late payments over 60 days because it will raise a red flag to some lenders.  Even if you obtain the loan, it may come with a higher interest rate and will less favorable terms.

Most lenders are interested in the last two years of data on your credit report.  Therefore it’s a good idea to maintain on time payments and verify that the payments are credited properly on your credit report.

Avoid Unnecessary Inquiries
Every time your credit report is accessed by a creditor it is noted on your credit report.  Most inquiries stay on your credit report for up to 2 years.  Inquiries made by you, for drug screening, pre-approved credit offers, background checks for employment are not reported on your credit report.

Excessive inquiries may cause lenders to think you are trying to get credit due to financial difficulty or you are taking on more debt than you can repay.  However, lenders do realize that some inquiries are a result of shopping around for the best loans and will overlook a block of inquires within a recent period.
 
The key to smart credit management is to fully understand how your credit report affects your financial future.  Reviewing your credit report is a vital part of financial planning and is one of the best ways to ensure you meet your financial goals especially when it involves major purchases.  Unknown inaccuracies on your credit report could cost you hundreds or thousands of dollars in the long run because creditors my grant you loans with higher interest rates and stricter guidelines.

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