The decision as to whether you secure financing, as well as your corresponding rate assignment, is based on two important factors: your credit score and the details listed on your credit report. Before you apply for a mortgage, auto loan, or other big-time financing, it’s critical, then, to conduct a review of your credit profile.
There are a number of steps you should take roughly three to six months prior to submitting a loan application.
Gauge Your Credit Standing
Lenders will look to your credit score to measure your creditworthiness, so knowing where you stand beforehand can help you gauge the type of loan and rate you may qualify for, and whether you need to improve your score to become eligible for more favorable financing offers. You can purchase a copy of your credit score from each of the three credit bureaus—Experian, Equifax and TransUnion—or use a credit score estimator, which provides an educated estimation based on certain factors you provide.
Obtain a Copy of Your Credit Report
Your credit score is based on the details listed in your credit report, and reviewing your file can point you toward credit accounts that may need a little work or alert you to inaccuracies. Similar to your credit score, it’s important to obtain a copy of your credit report from each of the three bureaus to make sure they all list the same information. By law, you are entitled to one free copy of your report per year from each of the three bureaus.
[Related: How to Order Your Free Annual Credit Report]
Correct Poor Credit Behaviors
There are a number of seemingly harmless financial behaviors that can put you at a credit disadvantage. To help build your credit score, figure out if any of these behaviors have become habits and try to and them. Making late payments may not seem too damaging if you pay the bill next month, for example, but late or missed payments can force your credit score to drop quickly. Common credit score blunders also include running up high credit card balances—even if you pay them off in full each billing cycle—and frequently applying for new lines of credit. To optimize your credit score, pay down small loan and credit card balances and refrain from submitting applications for new credit lines until after your loan has been approved.
Some actions that you may think will build your credit score may actually hurt you in the long run, such as closing old credit accounts. Eliminating old or unused credit cards will reduce your overall available credit limit, so it’s best to keep these accounts open and simply refrain from using them.
Remove Inaccuracies from Your Credit Report
Even if you manage your credit accounts wisely, your credit score may still suffer if there are mistakes or inaccuracies listed on your credit report. Foreclosures, bankruptcies, judgments, liens and accounts in collections can knock more than 100 points off your credit score, making it more difficult for you to obtain financing. Go over your credit report carefully and dispute any false details with the credit bureau that listed the errant item and the lender that mistakenly reported the information. By law, credit bureaus must investigate the item and report back their findings within 30 days. Obtain another copy of your credit report once the bureaus have confirmed the item has been removed to verify that your file is now error-free. It may take the bureaus between 30 and 60 days to correct your credit report, so be patient during this process and refrain from submitting new applications for credit until the item has been removed.
[Featured tool: Get your free Credit Report Card from Credit.com]