By Lee Huffman on March 30, 2021 in Life Hacks
Your credit score is one of the most valuable pieces of your financial puzzle. Having a great credit score doesn't guarantee financial success, but it can help you achieve your money goals. In this article, we'll share how and why you should keep an eye on your credit score, plus actionable tips to improve it.
What Makes up Your Credit Score?
Your credit score consists of five broad categories that enable lenders, insurance companies, and employers to determine how responsible you are in paying your bills and managing debt. These five categories are:
- Payment history (35 percent): are you paying your bills on time
- Utilization (30 percent): how much you owe versus your credit limits
- Length of credit history (15 percent): the age of your credit accounts
- New credit (10 percent): the number of recent credit inquiries
- Credit mix (10 percent): the variety of credit accounts you have
Any one of these variables can affect your credit score. Payment history and utilization make up two-thirds of your credit score, but each category is important to manage responsibly.
Why You Should Check Your Credit Score
Your credit score is a living creature. It can change on a regular basis as credit bureaus receive new information. Because credit scores can change frequently, it pays to monitor yours on a regular basis. By staying on top of it, you can take action to improve your score before submitting your next credit application.
To get a handle on your debt
Checking your credit score and credit report paints a clear picture of how much money you owe. Your credit report provides details for every creditor, including when the account was opened, how much you owe, your monthly payment, and your credit limit.
With this information, you can create a plan to pay off your debt. Popular strategies include the snowball method (smallest balance accounts first) and the debt avalanche (highest interest rate first). As your balances decrease and you pay off debt, your credit score will increase based on a lower utilization ratio (balances versus limit).
To be aware of what lenders may see
Before you apply for a mortgage, auto loan, credit card, or other financing, you’ll want to know your credit score. When you know you have a great credit score, you're in a better position to negotiate terms and conditions or to apply for a credit card with the best rewards and rates.
Conversely, if your credit score is lower than you want, knowing it ahead of time gives you an opportunity to improve it. Quick actions to improve your credit include reducing balances on credit cards, disputing errors and negative items, and asking for credit limit increases. Paying down balances and credit limit increases boost credit scores because they both lower your utilization ratio, which makes up 30 percent of your score.
To check for errors
With so much information flowing in, credit bureaus make mistakes. In fact, a study by the Federal Trade Commission (FTC) found that one in five consumers has had an "unresolved error" on their credit report. Because of this, it is important to check your credit report and credit score for errors on a regular basis.
Your credit score serves as an early warning sign that something may be wrong. If you notice an unexpected drop or feel your credit score should be higher, there may be an issue. By requesting a copy of your credit report, you'll be able to sift through the details to discover incorrect reporting or fraudulent activity.
To check for incomplete information
When reviewing your credit report, check for incomplete information such as address, work history, or details of your account. With a more complete credit profile, scammers will struggle to perform identity theft because they may not have all your personal information.
Additionally, some accounts may not show up on your credit report. When these accounts do not show up on your credit report or have missing information, such as your credit limit or account opening date, it can affect your credit score. Without a reported credit limit, your utilization ratio could be artificially inflated because the credit bureaus don't have all of the information.
When you find incomplete information on your credit report, contact both the creditor who reports the information and the credit bureau to update their records.
To protect yourself from identity theft
Identity theft is a real concern in today's digital age. The Identity Theft Resource Center found that data breaches exposed nearly 158 million Social Security numbers in 2017. Criminals can harm your credit with personal information in several ways. Examples include:
- Opening loans or credit cards in your name
- Adding themselves as authorized users on your accounts
- Establishing phone or utility services in your name
- Stealing your tax refund
- Getting medical care
- Pretending to be you when arrested
Monitor your credit reports regularly and look for unexpected spending, changes to your address or current employer, and new accounts. If you notice a change, act quickly to minimize damage by these criminals.
How to Monitor Your Credit
You can monitor your credit for errors, changes to your score, and financial goals. Luckily, you can check your credit score and credit report on a regular basis for free. However, make sure to watch out for scams trying to take your money and target your personal information (we’ll explain this in a bit).
Does your bank offer your credit score for free?
Many banks provide credit scores free to customers. If you have a credit card with the bank, you have even better chances. Depending on the bank, you may find your free credit score online, through the bank's mobile app, or on your credit card statement.
Some banks offer free credit scores to everyone. There is no catch to using these programs. However, the banks want to build goodwill with you so you'll consider becoming a customer in the future.
You can also subscribe to paid services, which provide credit scores, credit reports, monitoring, and more. Although some people feel more secure having one of these services monitor their credit, the majority of people do just fine using the free services mentioned above.
Review your credit report at least once per year
Credit scores are important, but they simply provide a summary of your credit history. They do not provide the details of what makes up that score. To look at the details, you'll need to review your credit report from each credit bureau.
Consumers should review their credit report at least once a year to look for errors, fraudulent accounts, and credit inquiries. Catching bad situations quickly can minimize the damage to your credit score.
Get your credit report for free from each credit bureau
The Federal government requires the credit bureaus to provide each American one free copy of their credit report each year. You can get yours at AnnualCreditReport.com.
You can order all three reports at once. However, many people choose to space out their free reports throughout the year. By spacing them out every four months, you can keep a frequent eye on your credit report details.
You can also access a free report if you are turned down for credit. The Fair Credit Reporting Act (FCRA) allows consumers to receive a free copy of the credit report used to decline their credit application. For example, if the bank used Experian's information to make their decision, you are entitled to a free copy of that Experian credit report. To obtain your copy, use the information within the "adverse action" letter sent to you to contact the credit reporting agency. You will receive your report online or through the mail.
COVID-19 has led to a lot of financial uncertainty for many people. With that in mind, consumers can access a free credit report every week from each credit bureau through the end of 2020.
Beware of scam websites
Be wary of other websites that use similar names or say they offer a free credit report. Often they will entice you with the word “free” in their URL address or make exaggerated advertising claims. Many of these sites charge hidden fees or sell your personal information. Some even trick consumers into opting into additional services during the sign-up process.
The websites that charge hidden fees often provide a free trial to their services. They plan on you forgetting to unsubscribe or make it difficult for you to cancel the subscription before the free trial ends. Avoid these websites to help protect your personal information and skip the hassle of trying to unsubscribe.
To steer clear of these scam websites:
- Do not click on links in your email. Type in the website address manually.
- Do not give out your credit card number. “Free” should not require you to provide a form of payment.
- Look for the padlock on your browser. This is a good thing and signifies that the website uses the latest security protocols.
- Double check the website address before entering your information. Scammers hope people won’t notice a misspelling of a website’s name when they lead you to a fraudulent copycat site.
Visit AnnualCreditReport.com for additional resources to protect your identity.
Contact your reporting agency if you notice an error
If you notice an error in one of your reports, notify the creditor and the credit reporting agency immediately. The credit bureaus offer online tools for you to dispute incorrect information. When submitting your dispute, it helps to provide an explanation and proof supporting your claim, such as a canceled check or a statement showing “paid in full” from the creditor. After submitting a dispute, the credit bureaus have 30 to 45 days to investigate your claim. Once the investigation is complete, you'll receive a notice summarizing the action that has been taken.
Follow up to ensure the error was resolved
When you submit a dispute to a credit bureau, you cannot assume it has been resolved. In most cases, the disputed item will be updated or deleted automatically. However, if your dispute is not approved, then the item will remain on your credit report.
The credit bureaus should notify you of the results of their investigation. If you don't receive them, contact the credit bureau to follow up on the status of your dispute. They may need supporting documentation from you to validate your request.
The Bottom Line
While it’s easy to forget about your credit score and credit report, it’s important to keep tabs on them. Thankfully, you can do that easily and at no cost. Free services can help you track your progress paying off debt, put you in a position for the best terms on future loans, and ensure you catch costly errors.