How Should I Prep My Credit Reports For A Loan Application?

John Ulzheimer

John Ulzheimer | Blog

Jan 27, 2014 | Updated Apr 27, 2016

“John, I’m planning to take advantage of lower interest rates and want to refinance my mortgage this year. At some point this year I plan to purchase a vehicle as well. What steps should I take to be sure that my credit is good enough to qualify for low interest rates on my new loans? I want to be as prepared as possible.”

Find Out What Your Credit Reports Have To Say

If your goal is to qualify for a new mortgage loan, auto loan, or really any other type of financing  then the first step you will want to take is to obtain a copy of your credit reports from all 3 credit bureaus – Equifax, Trans Union, and Experian. Thanks to the FACTA amendment to the Fair Credit Reporting Act in 2003 we all have the right to a free credit report from each of the 3 major credit bureaus annually.

Once you have acquired your credit reports, it is time to review them with a fine toothed comb. Check your reports for errors and inaccurate information (i.e. incorrect balances, invalid reporting of late payments, accounts which do not belong to you, etc.).

Incorrect or fraudulent data can cause major damage to your credit scores and, if any errors occur it can take quite some time to try to correct them. Therefore, if errors are present on your credit reports it is very important to be aware of them at least several months in advance of any loan application so that you will have time to work on correcting the errors.

Learn what’s inside your credit report here »

Shrink Credit Card Balances

Higher credit scores translate to lower interest rates for borrowers. If you want to have the opportunity to qualify for low interest rates on your new loans then it is a good idea to focus on trying to improve your credit scores as much as possible.

Probably the single most actionable way for most consumers to give their credit scores a boost starts by taking a good look at their current credit card balances. If you are currently revolving a balance on your credit cards each month then you are damaging your credit scores, even if you make every single payment on time.

The good news is that there is a relatively easy way to fix credit score damage which is caused by high credit card balances. The fix is to pay down your credit cards. I state that this is a relatively easy fix because I realize that it often not a financial possibility to pay off your entire credit card balance, especially if you’re in over your head in credit card debt.

However, if you can reduce your credit card balances by even 10% you might be surprised at the positive impact that doing so can have on your credit scores. Naturally, paying your credit cards off completely is the most effective way to see a potential credit score increase as you are preparing your credit for future loan applications this year.

Learn the steps you need to take to pay off your credit card debt now »

Consider Your Credit Off Limits

If your goal is to apply for a loan for a major purchase such as a mortgage or an auto loan within the next 60 days then it is important to heavily limit your credit activity. You will want to avoid any new credit applications prior to your mortgage or auto loan application.

If you are applying for a mortgage then you also want to avoid any new credit applications until after you have actually closed on the loan as well. Don’t think that it is fine to go out and finance a new boat for your future lake house just because you have been approved for the mortgage loan.

Your lender might need to pull your credit reports again before closing. Additionally, it is important to freeze all credit card usage prior to your loan application as well. If you have recently paid off your credit card balances this is especially important because you want to allow your newly acquired $0 balances time to show up on your credit reports.

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