How Fast Can Home Buyers Improve Their Credit Score?
It's a race against time to raise your credit score before taking out a loan.
When people set out to buy a home, they often start by checking out real estate ads and open houses, and taking a look into their bank accounts to see whether they can muster up anything close to a 20% down payment.
But there's an extremely important step that's all too easy to forgot in these early househunting stages: Making sure your credit score is as high as it can be. A good credit score (also called a "FICO" score) will help you not only qualify for a mortgage loan, but make sure you get the best possible interest rate.
And when you're paying off a gigantic debt over 30 years, even a small difference in interest rate can make a huge difference in what you'll ultimately owe. (Check out online calculators for to run some numbers.)
But why is working on your credit score so important to deal with early on? Particularly if you've always paid your bills on time, and figure your score is pretty good? Two reasons:
- Mistakes happen. A 2013 Federal Trade Commission (FTC) study revealed that one in 20 consumer's credit reports (from one of the three major credit reporting companies, Experian, TransUnion, or Equifax) contained errors. And not just little errors or typos, but significant enough errors to require the consumers to pay more for loan products. If you have a common name, for instance, someone else's financial blunders may be showing up on your credit report.
- Some mistakes take 45 days or more to clear up. The Fair Credit Reporting Act (FCRA) provides ways for you to dispute any incomplete or inaccurate information in your credit file. But getting results may take time. First, you'll likely have to send the information by mail, in order to document your claim. If you're lucky, the credit reporting agency will decide that your claim is clearcut or not worth reinvestigating, and delete it within three days. If you're not so lucky, it will decide that it needs to reinvestigate – in which case the law gives it a 45-day window in which to act, assuming you disputed the information after receiving your free annual credit report. (In other cases, it has 30 days.)
Many homeowners take fewer than 45 days to find the home of their dreams. If you're scrambling to get loan preapproval at that point – and mere days or weeks later, are scrambling to close on the deal itself – waiting around for a credit reporting agency to act could be frustrating and ultimately costly.
The good news is that, according to the FTC study, the majority of consumers who dispute an error are successful in getting a modification of their credit report. That correction doesn't always lead to a rise in their credit score – but it can, and it's a result worth trying for.
See Nolo's article, "How to Correct Errors on Your Credit Report" for details on this process.