Q: I’m looking to buy a house, but my credit is very bad. I believe it is around 580. But buying a home of my own is a top priority. Can you help me?

A: The first question you need to answer is why is your credit score so low?

Have you been late in paying your bills? Are there mistakes on your credit history? Have you gone through a bankruptcy?

If you have errors on your credit history, you can clean it up by asking the three main credit reporting bureaus (Experian.com, Equifax.com, and TransUnion.com) to remove the mistaken information. If your identity has been stolen, you can file a police report and then fill out an affidavit on the credit reporting bureaus’ websites so that your credit history is cleaned up. Once your credit history is cleaned up, your credit score will start to rise.

If your problem is that you’re simply late in paying your bills, or you have another significant piece of negative information on your credit history, the only thing that will help you is time. The good news is that time will heal all credit history wounds.

You can start the process of cleaning up your by looking at a copy of your credit history and score from each of the credit reporting bureaus. Access this online at www.annualcreditreport.com.

The reason I’m focused on cleaning up your credit is that at 580, your credit score puts you in the subprime category most lenders. That means you’ll pay a higher interest rate plus higher fees to get your loan. You may be forced to accept a prepayment penalty, which can be very expensive should you decide to sell or refinance before the penalty period expires.

While you can get a subprime loan, I’d much rather see you spend the next 12 months cleaning up your credit, and making all of your payment on time. Once you start making payments on time and allowing some time to pass since your last piece of negative information, your credit score will start to rise.

Once your score hits 620 (and you’re not too far away from that), you’ll be eligible for a much larger selection of better loan products from top lenders.

While you’re cleaning up your credit, you should be doing other things to plan for your purchase. Check out various neighborhoods. Think about what kind of house (condominium, single family, or townhouse) is right for you and your spouse or partner. Salt away some extra savings so that you’ll have enough cash for your down payment and moving expenses.

While a year sounds like a long time, it can take that long to find the right neighborhood and the right property. Waiting to buy a home until your credit is cleaned up will give you the time you need to properly plan for this significant purchase.

For additional help in cleaning up your credit and budgeting, check out a credit counselor affiliated with the National Foundation for Consumer Credit (nfcc.org).

June 29, 2007