Credit 101: How to Check, Build, and Maintain Your Credit
Good credit is important to almost everyone. Without a good credit score, you have to pay more to borrow money. With bad credit, it’s difficult to get essential financial tools like credit cards, auto or mortgage loans.
According to the three major credit reporting agencies (CRAs), almost 25 percent of consumers identify some type of errors on their credit profiles. Without the individual consumer’s attention to these errors, credit reporting agencies continue to report them to prospective lenders. U.S. credit laws protect the individual’s right to dispute these errors. This is just one of the reasons that knowing how to check, build, and maintain your credit is essential in today’s world.
If you’re concerned that staying on top of your credit will take too much time, take heart. Checking your credit score online is fast and easy.
Now, in the wake of a massive information breach at Equifax, we must stress the importance of credit security. For those unaware, Equifax is one of three major credit reporting agencies, and it recently had a massive security breach. This leak involving the records of 143 million consumer’s personal information and credit information, and it was caused by poor password strength on the part of Equifax administrators.
If you’ve used Equifax in the past and think you may have been put at risk due to this leak, we recommend contacting Equifax immediately. From here, you may consider enacting a credit freeze. A credit freeze would ensure that no-one can open a new account in your name using this leaked information. This won’t prevent someone from tampering with your existing funds, but it is a worthwhile step toward securing your accounts. Additionally, it’s recommended that you begin monitoring your credit card and bank transactions for abnormal spending activity or transfers.
The Consumer Financial Protection Bureau reports that regularly reviewing the content of your credit reports has even more value than checking your credit scores. Although lenders use credit scores as a snapshot of your creditworthiness and use scores to determine credit card lines of credit or annual percentage rates (APRs), loan rates or terms, credit reports get to the heart of your score.
For instance, if your good credit scores decline, analysis of credit reports may demonstrate you’re the victim of credit fraud. If you’re rebuilding credit after a personal financial crisis, checking credit online is also invaluable. You have the option to pay for each CRA’s credit tracking service at about $20 per month or access other credit information resources mentioned below.
It’s also possible to purchase what lenders call a “tri-merge” credit report from a variety of providers. This report provides a side by side review of your credit reports from all three CRAs. A tri-merge report can help you identify errors reported by just one CRA or those reported by all three.
Other credit professionals recommend the myFICO.com site as a consumer resource. This credit information site is owned by Fair Isaac, the creator of the FICO score used by most lenders to make credit decisions.
How to Check Credit Online at No Cost
Every U.S. consumer can request free credit reports at least once per year at no cost from AnnualCreditReport.com. If you’re unemployed or you’ve been declined by a lender for credit, you can request a copy of your credit report for free.
These free credit reports won’t contain your credit scores, however. Each CRA has a credit tracking product for sale to consumers. Since credit scores can widely vary between CRAs, it’s also important to check these scores before submitting an application for a credit card or other loan.
The Credit Karma site offers another option for checking credit online. After confirming your identity by supplying a phone number, home address, email account, and the last four numbers of your Social Security number, both TransUnion VantageScore and Equifax credit score will be available. You won’t receive your Experian FICO credit score from the site.
Your credit scores from Credit Karma may be different from those provided to lenders checking your credit. According to the Fair Isaac Corporation, almost all lenders fine tune CRA FICO scores with their own proprietary algorithms. For this reason, regularly checking your credit reports and disputing errors—including how CRAs report your name and address—are important to building and maintaining a good credit score.
Building and Maintaining Good Credit
If you haven’t used credit in the past, you must build a credit history. Applying for a secured credit card or asking a trusted friend or family member to add you as an authorized user to a credit card account can help you build credit. Alternatively, apply for a loan and, if needed, get a co-signer.
Make sure to ask the secured card issuer or account on which you’re added as an authorized user about reports to CRAs. The card issuer or lender must report to the CRAs each month in order to build credit history.
Once you have credit, make payments on time. Late payments or default of your financial obligations will hurt your credit scores.
If you’ve been using credit for years, you probably already know the importance of making payments on time. However, timely payments aren’t the only element evaluated by the CRAs to compute your credit scores:
- Check your credit usage: don’t use more than 30 percent of available credit. If your balances climb above 30 percent, pay down balances as a priority. Consider loan consolidation as a way to reduce monthly payments and annual percentage rates charged on any outstanding balances. Compare lenders to identify the best loan consolidation options for your budget.
- Check the age of your existing accounts: don’t add too many new credit card accounts in a short period of time. Even if all of your credit cards are secured, the CRAs prefer older and established credit lines.
- Consider the type of credit reporting: adding a real estate loan can help your credit while adding a few credit cards can cause your good credit score to decline.
As you can see, checking your credit on a regular basis is one of the ways to learn how to build, maintain, and improve your good credit score. Bad credit is costly and, thankfully, it’s completely avoidable.
Review Your Credit Reports and Credit Scores
It’s important to check credit reports on a regular basis. Mistakes happen. Lenders make reporting errors and, if one or more lenders reports incorrect information for a few months or years, your credit scores will decline. Dispute errors as they occur so you won’t face the arduous task of extensive credit repair.
Having good credit will save you money. According to the Federal Trade Commission (FTC), less than good credit costs thousands more per year. Your home mortgage or car loan will cost more. For example, a borrower with fair credit pays almost $4,000 more to service his or her mortgage than a borrower with good credit.