If you have bad credit, it can mean less than favorable interest rates for you as well as costing you thousands more when you get a car loan, a student loan, or take out a mortgage. It can result in your not being able to lease that apartment you want so bad, and it can be a black mark against you that stops you from landing that dream job.
These are all good reasons why it pays for you to understand the basics of your credit report and your credit score, the behaviors that can increase or decrease your credit score, and the services available to aid you in monitoring your credit.
What are credit report and credit score?
Your credit report is simply a summary of your borrowing history and your repayment history, such as new accounts, unpaid bills, closed accounts, late bills, etc. If you have a mortgage, credit card, or loan, it will be seen here. Your credit report presents the basis for your credit score.
Your credit score, which is also called your FICO score, is a three-digit number somewhere between 300 and 850 that is calculated from a formula that gauges your creditworthiness. The three main credit-reporting agencies, TransUnion, Experian PLC, and Equifax Inc., buy the FICO formula from Fair Isaac.
The bureaus use your personal data and then crunch the numbers, but each does it slightly differently so your score can be slightly different between agencies. When a lender looks at your application for credit, they will use one or all of the credit agencies to determine your score, which tells them how reliable you are as a borrower.
Here are a few key areas of your credit score:
- Type of credit – the accounts you hold such as credit cards, auto loans, mortgages, student loans, etc.
- Amounts owed – your credit balance breakdowns, compared to the limits you are allowed to borrow. If you are maxed out, it can hurt you.
- Payment history – how you pay your bills – on time or late – including credit cards, utility bills, student loans, other lenders, etc. that report to the big three credit reporting agencies. Make sure you pay by the due date.
- Years of credit – how old your accounts are. The longer your credit history is, the easier it is for lenders to determine your ability to repay. Regrettably, the formula knocks young borrowers who have not yet established a detailed history.
- New credit – how many accounts have you recently opened, and how many lenders have made an inquiry on your credit? The more activity, the more it looks like you are about to go on a debt spree.
Are you in need of credit monitoring?
Does it worry you that an identity thief might be running up huge debts in your name. Credit-monitoring companies are counting on your fear, especially if you have been a victim of a data breach already. Before you spend $100 or more annually for a credit watchdog, you need to ensure you are paying for the service for the right reasons.
Perhaps you are aware you won’t keep ample watch on your own. Maybe you are applying for a mortgage and want to ensure your credit stays perfect. Or maybe you are just obsessed with the worry of credit fraud. If so, credit monitoring may bring you the peace of mind you need.
If you can’t decide if credit monitoring is right for you, consider these ways that you can protect yourself from credit card fraud and/or identity theft:
Regularly check your bank and credit card statements for transactions that are not yours. Make it a habit to scan your financial accounts at least weekly. Some creditors permit you to set up your own alerts that will notify you whenever online transactions are made using your account(s) or when a purchase is over a specified amount. This service is offered for free.
Watch your credit report. The law entitles you to a free report annually from each of the three bureaus, so you might as well order a different one every four months. Scan it for abnormal activity, such as accounts or credit cards you didn’t open.
How to choose the right service and boost your credit score
Base your purchasing decision on just how in-depth you want the monitoring to be and how much you are willing to pay for it. If you are careful about your credit, there are a number of common-sense steps that you can take to keep your credit healthy. Credit monitoring might not be worth the extra money.
The big three credit agencies offer products designed to detect fraud and to produce your credit score. Each agency offers numerous packages depending on how attentive you want them to be. Many banks also provide services that are similar so check around, because you may be able to get a better offer through your financial institution.
Consider the cost prior to signing up. Some services can cost upwards of $50 per month to keep an eye on your credit, which can be more than $500 annually. Compare the expense against the risk of credit card fraud. It is estimated that identity theft touches 3 percent of Americans every year—with credit card fraud making up only a small percentage of that.
Lastly, keep an eye out for bureaus that are promoting fancy scores that claim to measure your credit risk with the latest formula. You only want the FICO score, which is the one that lenders use and request. The other so-called FAKO scores—like Experian’s Credit ScoreTracker, TransUnion’s TransRisk score, or Experian’s PLUS score are nothing more than money pits taking your hard earned money. They will do little more than confuse you about where it is you actually stand. If you just want your score, you can order it through Fair Isaac.
If you are simply looking to keep your credit healthy, it’s not too difficult. Limit your credit cards, space out when you apply for loans/accounts, don’t max out your credit cards, don’t carry unpaid balances, and set up automated payments to pay your bills on time. If you don’t go crazy with credit, you should be okay.
If you pay for credit monitoring or you decide to do it on your own, make sure that any errors you spot are reported. Contact the agency responsible for sending the report. Each has their own process to report errors. Incorrect information can damage your credit score.