It’s nice to have excellent credit. You get the best loan rates when shopping for a mortgage or a car loan. Credit card companies give better interest rates and raise credit limits. Car insurance companies use it, as do government agencies, utility companies, and collection agencies. Even employers and landlords may want to look at your credit report! Since it is an important part of our financial lives, it is a good idea to monitor your credit score at least once a year, and if it could be higher, work to improve it.
For starters, you can go to www.annualcreditreport.com and request your free report from one or all of the credit rating companies: Experian, Transunion, and Equifax. I suggest inquiring about one at a time, so you can check another one two other times later in the year for free. You can also create accounts with some of these companies to get your free report. I generally try not to pay for subscriptions for this, but it might be something to consider.
The main reason I check my credit report is to monitor for identity theft. I want to be sure there are no new credit cards issued using my name and social security number. Periodically we hear about data breaches where consumer information is stolen or otherwise exposed. Bad guys collect and share this information and could use it. I imagine there are so much identity information out there, that the fraudsters simply haven’t gotten around to using to mine yet. For example, Equifax, yeah one of the three credit reporting companies, had a data breech of 147 million people back in 2017. That’s at least half of the adult population of the US. Then there are other identity breaches from health care, banking, credit card companies, and others. My point is that the only practical alternative is to monitor for identity theft so you can catch it early if it happens.
What is on your credit report? The report has information about where you have lived, where you have worked, phone number you’ve had, credit accounts your opened, including credit cards, mortgages, car loans, and others. It also has information about whether you’ve paid these credit accounts on time, whether you’ve declared bankruptcy.
What affects my credit score? Not paying bills on time is probably the biggest factor. Not just having a late payment, but really missed payments for several months. They also look at how much credit you have, how long your longest account has been open, the percentage of credit you are using, and how often you have had inquiries into your account.
What happens when I apply for a new source of credit? When you apply for new credit accounts, it can decrease your score temporarily due to the inquiry. If you are considering a new mortgage or car loan, for example, it is a good idea to get several quotes in a short period of time. Its better for three companies to pull your credit report in a two-week window rather than over several months. Another way to improve your credit is to budget your spending so you can set up automatic payments of bills at your bank. If cash flow is irregular, it is good to set up bounce protection with a savings account or even a home equity line of credit so you can pay bills on time automatically and avoid paying bank fees for insufficient funds.
What can I do to improve my credit score? Back in college, I remember the first time I applied for a credit card. They said, “its not that you have bad credit…. it’s that you have no credit history.” Since I had never used credit there was not trace of my existence on my credit report. I set up an asset-backed credit card where I had to freeze $500 of my checking to get $500 of credit on a credit card. Over time, the bank trusted me to give me a regular credit card. Over time, I was able to open another card. Find a card that has no annual fees, if possible, and keep it the long term. Your longest held credit account is one component of your credit score, so you need one to keep for the long haul.
What can you do if you have bad credit? You need to build back your credit by using some form of credit and paying the bills on time. You can also explain certain parts of your credit report by requesting to add commentary. You can also dispute accounts that were not opened by you, or dispute items submitted to your report if you feel they are not accurate. Aside from these tips, there are companies that specialize in improving your credit score.
While reviewing credit reports and improving your credit may not be on your list of New Year’s resolutions, it is an easy and free step you can take to protect yourself against identity theft and to improve your financial life.