There’s a good chance that you have an error in your credit report – a 26% chance according to the Federal Trade Commission – and half of the time, those errors will impact your credit score. This is important because more and more areas of your life are credit driven: Whether you’re buying a car, a house or just about anything else where you’re not paying cash, you’ll likely pay more with a lower credit score.
A common example is getting financing for a house. There are several credit scoring models but the one used for mortgages is Fair Isaac Corporation’s FICO model, with scores ranging from 300 to 850. Most of the loans on residential properties are acquired by Fannie Mae or Freddie Mac, as such are underwritten and priced according to their guidelines. Freddie and Fannie have what’s referred to as risk-based pricing and loans that they buy are subject to guarantee fees, or G-fees, that directly tie into your credit score and have a significant effect on the interest rate that you pay for a home loan. For example, in a hundred point spread, from 639 – 740, the cost for a loan with 10% down will vary by 3 points. A point roughly equates to 1/8% interest on the loan, so someone with a 639 FICO score will have about a 3/8% higher interest rate than someone with a 740 FICO score. Or the 3 points could be paid for up front: On a $300,000 loan, that’s $9,000!
Credit errors are so common and the potential effects so great that the government has forced the three credit bureaus to provide a complete credit report free every year – all you have to do is ask for it. If you request your credit report from one of the three bureaus (Experian, Transunion or Equifax) every four months, you may be able to catch an error sooner rather than later. There is only one official web site for this purpose, and it’s totally free: www.annualcreditreport.com. Check it out and stay on top of random errors!
About The Author
