How a simple credit error can ruin your home-owning dream

Imagine the anxiety of watching your credit score unexpectedly plummet after spending your entire adult life maintaining good credit.

Now suppose this credit decline blocks you from getting a mortgage on the house you planned to buy.

That’s precisely what happens to many mortgage applicants all across the country with surprisingly high frequency.

All too often the culprit is unpaid phone bills. In some case's your cellphone provider will send an account's to a collection agency after being just more than a month late, especially on its cancellation fee. That causes your credit score to drop like a lead pickle, approximately 80 points (out of a theoretical 900) virtually overnight.

It never should have happened that way. Collections are meant for people who can’t or don’t want to pay their debts. But sometimes, for one reason or another, people honestly don’t know they’ve missed a payment. Reputable creditors make bona fide efforts to contact debtors for payment before taking this extreme measure.

For most borrowers, it’s just a simple oversight. But as this example shows, something as small as an unnoticed cellphone charge can spell credit-score disaster. Sometimes cellphone providers stop automatically billing your credit card and e-mailing you outstanding charges. If you cancel the account they may switch to sending a postal invoice which can catch you out.

If you’re applying for a mortgage and have had a collection notice this can have knocked your credit score below the magic number that you need for the mortgage and interest rate that you are wanting. If previously you had great credit and can explain the mistake the lender can make an exception to get you approved.

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You can also speak to the telephone company and getting them to agree to correct the credit report, options can be to change its “unpaid collection” rating (which is bad) to a 30-day late rating (much less bad).

Worst case, if you have a big enough down payment, you can always get a mortgage from a lender that doesn’t care about your score, or cares less. But you’ll have to pay a much higher interest rate. We’re talking thousands of dollars in extra interest here, thanks to an innocent mistake.

If you’re going home shopping after cancelling your phone service, do yourself a favour and confirm your zero balance in writing.

Four more tips to avoid credit score drama:

• Do you pay bills from your credit card? If that card number changes, notify the company right away to avoid missed payments.

• If you have to argue with a creditor about their mistake, always record the persons name, date etc.

• Whenever you move, make it a habit to contact Canada Post. Ask them to forward your mail to the new address for six months.

• Prevent credit surprises by checking your score before you apply for a mortgage, and at least 90 days before your closing date. You can do that here.

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