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Refinancing? Fix your credit first

Posted on October 15 By Peter Andrew

Average home prices nationwide were 12.4 percent higher in August 2013 than they were at the same time in 2012, according to the CoreLogic Home Price Index. That month was the seventh in a row when year-over-year home price rises were in double percentage figures, and the 18th when they rose at all. Although those increases weren't consistent across the country, they still mean that millions of Americans have seen their underwater home loans break the surface and finally return to positive equity. And that, in turn, means it's easier for them to refinance at a good interest rate.

Credit and the best refinance rates

However, the very lowest mortgage rates are reserved for those with great credit, and it is a good idea for everyone to pull their reports before making any significant credit application, let alone a new mortgage. This applies, even if you are one of those people who always act responsibly with your finances. Earlier this year, CBS News reported that an estimated 40 million Americans have errors in their reports -- half of which are serious -- so being innocent is no guarantee that you will have a spotless record. Since 2005, Americans have been legally entitled to access a free copy of their credit reports once each year, and you can exercise your right at AnnualCreditReport.com.

In a downloadable PDF, the National Consumer Law Center describes what you should look for once you have your credit report in front of you:

  • Errors: Perhaps one of your lenders has provided factually incorrect information or someone else's problems have been mistakenly attributed to you.
  • Information more than seven years old: Nothing (except information concerning a bankruptcy) on your report should relate to a period more than seven years before the report's date.
  • Bankruptcy information more than 10 years old: Again, this information should be expunged from your record after 10 years.

It can sometimes be hard to persuade a credit bureau to correct errors. For more information, check out Five rules for fixing credit report errors.

Repairing your credit

If your credit score is lower than ideal but you don't have grounds to appeal, you can still do some things that might bump it up a bit. Most of these are likely to take a few months to have any impact, but they are well worth doing because they just might put you into a different borrower category which may entitle you to lower refinance rates.

Here are some suggestions:

  • If you're behind on any account, get current -- and stay that way. Make sure from now on you're never even a minute late paying anything.
  • Pay down credit card balances as much as you can. These affect your "credit utilization ratio." Some suggest your score may be negatively affected if you are using more than about 30 percent of your available credit.
  • That means it can be a mistake to close credit card accounts. You want your total credit limits to be high but your usage of them to be low.
  • Although having a good mix of revolving credit (mostly credit cards) and non-revolving credit (auto loans, personal loans, home-equity loans, and other fixed-period borrowing) can improve your score, it is generally a mistake to apply for any new credit in the months before you apply to refinance.
  • If you do have to apply for new credit, make sure your applications are for similar finance types and are made over a short period. The myFICO website says: "FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur."
  • If you choose to track your credit score to see how its improving, you can do so -- although you're probably going to have to pay, because you only get free access once a year. You can see your own report as often as you want without that affecting your score.

Follow that advice, and there's a better chance your score would rise over time. Of course, it can take years to fully repair a badly damaged report, but some improvements can be seen over just a few months -- and they might just be enough to win offers with lower rates. Good luck!

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