So you thought you did away with grades and competitive scoring when you finished school? Turns out, a three-digit summary of your creditworthiness may be the obstacle or the key to your perfect home. Despite your present sense of financial responsibility, if you have a dark past of not always paying bills on time, it could mean you're going to have a very hard time securing a good loan during your house hunt.
Your credit score is a number between 300 and 850 that is meant to represent how credit-worthy you are. Credit reporting agencies calculate this number based on your credit report. This report shows not only how consistently you've made payments in the past, but what kind of accounts you've opened and how long you've had them. And this information, of course, is of particular interest to the companies who are considering granting you a loan now. The companies that you pay regular bills to, like utility and credit card companies, tell credit reporting agencies -- like Experian, Equifax and TransUnion -- about their financial dealings with you.
Using this information about your payment history and accounts, the agencies calculate your credit score and can offer it to interested parties like credit card companies, your prospective employer or even you. When you apply for a credit card or any kind of loan, the lender wants to know if you're likely to make payments consistently and on time. They don't have the means or the time to get to know you personally and talk to your friends to see how responsible you are with money. Instead, they'll make an inquiry into your credit history. If your credit report is less than stellar, they may reject you or tack a steep interest rate onto your loan.
Maybe you think, I can't change my past, so why is looking at my own credit so important before I start house shopping? What you may not realize is that there's a good chance your report has an error on it right now. One study found that about 79 percent of reports contain some wrong information, and as many as 25 percent have seriously damaging errors [source: CNNMoney].
Fortunately, there's a solution. You are entitled to a free credit report every year (at AnnualCreditReport.com). If you find an error, the Federal Trade Commission (FTC) recommends that you contact the credit reporting agencies in writing stating what you dispute [source: FTC]. Try to include copies of documents that support your claim. The agencies address the issue with the creditor institution and must respond within 30 days.
Fixing possible errors isn't the only reason to check your credit reports. Looking at them will give you a better idea about what interest rates to expect and help you budget for them. Remember to check the reports long before you apply for a loan to give yourself time to fix errors and possibly start improving your credit. Take full advantage of your right to see your credit reports once a year.
Next, we'll step back to look at the big picture that too many people forget to consider.