Why You Should Check Your Credit Regularly

by Silicon Valley Blogger on 2008-07-1526

What’s the big deal about credit scores? Since credit scores are recognized as predictors of future bill paying ability, the better your rating, the more financing options and terms that are made available to you: just think of all the situations your score enters the picture:

Who Checks On Your Credit? What Your Credit Score Affects
Lenders Bank loans: a home mortgage, car loan, credit card, business loan are all much more expensive with poor credit. You’ll get faster credit approval with good credit.
Insurers Auto insurance premiums and rates, home insurance rates. A good score can be responsible for lowering your premiums by 31% than what it would normally be. A bad score can raise premiums by 143%.
Landlords Your credit rating can be an indicator of how prompt you are about paying the rent.
Employers 35% of employers check up on you to make sure your focus is on your job and not on your financial problems.
Utility Providers Cell phone providers and other agents may offer less than optimal plans and rates to those with poor credit. This way, providers manage the risk of payment default by customers.

Source: MSN Money

So it’s clear why we’d want to stay on top of our credit profile: the more we know about it, the better we can manage it. What’s interesting is that informal polls have shown that almost half (49%) of those polled did not know the significance of these scores.

Tips On Getting Your Credit Score and Report

There are two elements to your credit profile and rating: your credit report and your credit score. While credit reports can be obtained for free rather easily, you will typically need to pay for your credit score although free credit scores do exist with some caveats in their usage. We’ll expound on this further below.

Some general tips on securing your credit information:

#1 Start out with free credit reports.

To get a good picture of your credit several times a year, you can order your reports from AnnualCreditReport.com, which is the central, official site from where you can conveniently obtain free credit reports.

#2 Stagger your free credit report orders.

It’s wise to stagger out your orders for these free reports so that you get one from each of the three bureaus every 4 months. However, even though you can do this, you won’t get your credit score for free. Unfortunately, what you get from AnnualCreditReport.com does not include that magic number called your credit score, so you’ll have to determine whether you need to pay for that extra information.

#3 Not all credit scores are equal.

Don’t look now but you probably have many credit scores to your name:

  • You get a score for each credit bureau that makes the calculation.
  • Your score changes over time based on your financial habits.
  • Be aware that some scores used by lenders or insurers are based on estimates so by knowing your real scores, you can make the appropriate corrections and justifications when dealing with these agents.
  • Credit bureaus don’t share their data with each other.
  • Lenders typically check all your scores when large loans are involved.

Just take a look at the various credit scores available to consumers. The most widely used scores are the FICO scores:

Credit Score
Where To Buy
Range
FICO Score (TransUnion) myFICO 300 – 850
FICO Score (Equifax) myFICO 300 – 850
FICO Score (Equifax) Equifax Score Power 300 – 850
Experian Plus Experian 300 – 850
VantageScore Experian 501 – 990
(letter grade: A – F)
Credit Karma Score Credit Karma 300 – 900

Credit scores are calculated differently by the different credit reporting agencies. Things can be confusing here since Credit Karma, TransUnion and Experian use their own proprietary algorithms while Equifax uses the most widely used credit score formula (from Fair Isaac Corp or FIC) called “FICO”. The numbers themselves may not be equal but they may source the same credit report as the basis for their calculations:

Perhaps the most obvious difference among the scores is their ranges. For example, Equifax uses FICO’s credit-score range, from 300 to 850. But TransUnion uses a range from 400 to 925 (I’ve also seen it reported as between 150 and 934), and Experian scores are reported with a range of 330 to 830. A FICO credit score of 790 from Equifax translates to a score of 868 from TransUnion and to a score of 776 from Experian. But consumers could count on roughly equivalent scores so long as the underlying data on file with each credit-reporting agency are essentially the same.

Let me clarify that we’re discussing proprietary TransUnion and Experian scores here, which you get by visiting the TU and Experian sites independently. In actuality, FICO scores based on TransUnion and Experian credit reports do exist as well, which are scores that are calculated using the FICO formula. You can find these scores in our table above.

If you’re still confused, here is how to think of these scores:

  • Equifax score is strictly a FICO score. It’s available at myFICO.
  • TransUnion score can be proprietary if the TU non-FICO formula is used to calculate it. But it’s based on your TU credit report. This may be available at the TransUnion site.
  • TransUnion score can be FICO if the FICO formula is applied to your TU credit report. This is available at myFICO.
  • Experian score can be proprietary if a non-FICO score formula is used to calculate it, but it’s based on your Experian credit report. This may be available at the Experian site.
  • An Experian FICO score is no longer available. Check our update on the Experian credit score and report story for more details.

#4 Only pay for credit scores you need.

Some of us don’t want to bother with the variety of scores that are generated in our name. Some will want to know them all for their peace of mind, particularly to ensure that there are no glaring mistakes in the calculations done by the reporting agencies or to keep an eye out for fraud or ID theft. At the very least, you’ll avoid surprises if you get those scores that will be in use for any upcoming transactions you’ll be involved in. Lenders are likely to check all your scores if you’re applying for major loans. If you care about only one score, then you should stick with a FICO score that’s available at myFICO.

#5 Use a FICO score simulator.

It’s not the real thing, but you can get an approximate idea of your credit rating by trying out a simulator tool like this. To some degree, it may provide you an indication of your credit-worthiness. You can also play with some variables to see how certain hypothetical events can affect your credit.

#6 Watch out for “Free Credit Score and Report” scams.

There are other web sites out there that will purport to provide you free credit reports, free credit scores and free credit monitoring, but these are recognized as “impostor sites” by the Federal Trade Commission. Here is what the FTC says about these so-called credit web sites:

Only one website is authorized to fill orders for the free annual credit report you are entitled to under law: AnnualCreditReport.com. Other websites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. In some cases, the “free” product comes with strings attached. For example, some sites sign you up for a supposedly “free” service that converts to one you have to pay for after a trial period. If you don’t cancel during the trial period, you may be unwittingly agreeing to let the company start charging fees to your credit card.

Some “impostor” sites use terms like “free report” in their names; others have URLs that purposely misspell AnnualCreditReport.com in the hope that you will mistype the name of the official site. Some of these “impostor” sites direct you to other sites that try to sell you something or collect your personal information.

So be forewarned that in this case, “free” most likely will come with a catch.

Why You Should Check Your Credit Regularly

By law, you are entitled to free credit reports from the three credit reporting agencies (Experian, TransUnion and Equifax) once per year as dictated by the Fair Credit Reporting Act (FCRA). In many situations, that’s all you’ll probably need, but some establishments may prefer to review your credit score because it’s the quick and easy way to gauge your financial standing. Really, who wants to wade through credit report paperwork when a number can tell all?

While your credit report is a record of all your credit-related activities, your score is the number that represents your credit health based on your report. Through secret recipes closely held by the credit bureaus, pages of your credit report data are distilled and boiled down to this one number that’s so much more convenient to digest and process. Many businesses like using these scores because these numbers provide a way for the businesses to standardize their payment terms and policies.

 
THIS NOTICE IS REQUIRED BY LAW. Read more at FTC.GOV. You have the right to a free credit report from AnnualCreditReport.com or 877-322-8228, the ONLY authorized source under federal law.

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 17 comments… read them below or add one }

EN July 16, 2008 at 12:10 am

Thanks for the write-up. I always wondered why they give us 3 free credit reports and yet can’t add one measly credit score. I heard this somewhere but not certain….WaMu/Providian credit card customers have free access to their scores.

JoeTaxpayer July 16, 2008 at 6:56 am

WaMu does, but – I got a Wamu CC in April, and saw my FICO score pretty quickly, but it hasn’t been updated since, three months now. Others have said that they see a monthly graph and can track how their new accounts and/or changes in open accounts impact their scores. I may give WaMu a call.
Joe

Silicon Valley Blogger July 16, 2008 at 8:06 am

Thanks for pointing out the Wamu/Providian resource. That’s would be a nice benefit to being their customer if that’s the case. :) Especially if FICO scores change often.

Nice touch to have a monthly graph as well. I wonder if this is a permanent service/feature they have and whether it applies to their checking/savings accounts.

Joshua Long July 16, 2008 at 5:54 pm

You can now get your TransUnion score (and soon to be Equifax and Experian) for free without any hooks or scams at CreditKarma.com. Ken Lin has put together a great website that everyone should know about. I’m interviewing him in depth about it and the credit scoring world on our WealthFoundationSummit.com series on Tuesday July 29th at 5pm PDT.

Silicon Valley Blogger July 16, 2008 at 10:04 pm

Yep, I got contacted by a representative of Credit Karma, a service which has partnered with the 3 credit bureaus to provide us with free credit scores! And not only that, Lazy Man put up a post about Credit Karma as well.

So to let you in on this free credit score service, check out the message I received from Credit Karma:

“Hey there, I noticed your post “Your Free Credit Score: Is There Such A Thing? ” and would like to suggest that you check out Credit Karma dot com. The site allows consumers to check their credit score for free and as often as they would like. The score is gathered from the three major credit bureaus and is legitimate. Credit Karma also provides tools for monitoring the score over time. The most unique thing about the company is that it provides special offers to consumers based on the range that their credit score falls in.

Founded by a bay area executive from E-Loan and Upromise, Credit Karma allows consumers to understand how specific behaviors such as opening or closing a line of credit can improve a credit score over time.”

Thank you to Melissa Hourigan for this message and to Joshua Long for pointing this out to me in his earlier comment.

It’s wonderful to hear about new products and services address something that so many wish had always existed. :)

Friends and Money July 17, 2008 at 3:14 am

excellent advice, i especially like the free credit report trials that are now being offered by most large credit companies. These can be a great way to get a feel for the service they deliver

T.J. July 17, 2008 at 10:36 pm

Not too sure about Credit Karma at this time – they’re new aren’t they? They require you to give up your social security number so they can look you up and that’s something I don’t give up too easily to a new site.

Stephen Chua July 23, 2008 at 3:13 pm

I was just browsing – but such great content here. Reading this post strikes me of one very common omission when managing your credit checks.

It is correctly put that everyone should know their own credit history and manage it prudently with an even better managed lifestyle – credit cards, mortgages, family life, etc.

But I’m always horrified when advice goes the way of using credit services and authorising numerous agencies or people to have access to your credit scores. Here’s what always happens to your info/credit score:

1) numerous credit checks will always cost you credit points – e.g. 10 people/agencies checking up on you over a short period of time could cost you 10 x 5 points = 50 points deducted from your score.
Imagine shopping for a mortgage and then finding out that your credit score will cost you 2% more for your mortgage! Simply use one mortgage specialist who does only one credit check and shops for the best deal for you.

2) Giving your sensitive personal information to say a car salesman (who will do a credit check and hurt your credit score even more and whereever else that your information may end up); or other credit agencies, be very certain your personal information is NOT 100% secure! There are a number of situations that your information can become available to special queries – this is a HUGE privacy concern.

3) You’ll start to concern the lenders and simply reduce your bargaining power for better rates and terms.

Just remember that you can do the checks yourself and do it free of charge without credit score penalty. Actually, a good bank officer or a broker can actually help you reliably and yours and their integrity remains intact.

I hope this helps someone as I have had similar personal disasters and helping others overcome it takes so much time, effort and a lot of nail biting.

Jake August 21, 2008 at 8:46 am

I recently saw this website – http://www.freebiecreditreport.com – claiming that you can get a credit report & credit score 100% free. Ha! Yeah as long as you remember to cancel the 7 day trial. Consumer beware, sign up for these services if you must, but remember to cancel before trial ends or be billed up to $30/month.

shilsan September 16, 2008 at 8:40 am

I agree, “AnnualCreditReport.com” gives you a free credit report. Under federal law, you are entitled to receive a free copy of your credit report once every 12 months. There are other websites also but most of the providers require sign up for services like Identity Theft protection, Credit monitor etc.
You can also visit “http://www.GetUrScore.com”. This provides the links to various providers of Free Credit Reports and Credit Scores and also gives the comparisons on offers from different providers.

Chris Hornak September 18, 2008 at 6:49 am

Those catchy commercials tricked me into using freecreditreport.com and now I’ve been trying to cancel my subscription for a few months. It’s free at first then they start charging you if you do not call in to cancel. So far the cancellation process has not been easy.

So be careful if it says FREE it might not really be free.

Sam October 28, 2008 at 1:36 am

Excellent write up!

Who would not be attracted to the term “free”? :)

This is what encourages “some” companies to keep developing marketing strategies to target consumers who are easily attracted to “free” offers. It’s up to us to be extra careful when it comes to something that is being termed as “free”.

As like Chris, I have seen many of my friends getting tricked to use freecreditreport.com.

Sade Jordan November 30, 2008 at 6:05 pm

In the “credit” business the word “Free” means, “you pay later”. The FREE CREDIT REPORT offer is a teaser to sign you up for a monthly financial commitment. However, I would say it’s money well invested. Your credit after all is your money name.

Svenson in Australia April 2, 2009 at 2:01 am

Free credit score? Many credit card company’s highlights the word free to attract more credit card sign ups. The truth about this is after your card being approved hidden charges will then appear. Nice post. Thanks for sharing.

Simon September 5, 2009 at 6:42 pm

I live in India and at first I did not get what credit score is. After reading your post I got some idea about it. Thanks!

Easy September 21, 2009 at 5:05 pm

No cards are easy to get approved for anymore. Consumer credit lines have now been cut by over $2.5 Trillion (last week’s figures, thru end-July). Credit lines are being reduced or eliminated entirely. New credit is not being extended unless you have excellent credit.

If you can get a new credit card application approved, the amount of the credit limit will depend on your income and amount of credit currently available to you.

JD January 8, 2010 at 10:08 pm

Great tutorial and synopsis in this article and some excellent comments, too. I might add: In this current economic climate there is one more thing your readers should be aware of when it comes to evaluating FICO scores. That is…a score of 750 minimum is now the standard. The days of 650 FICO score are gone and likely will never come again.

By the way, the tip about hurting your score by too many inquiries is absolutely true. Whenever we apply for credit we tell the prospective lender our score to use as a guideline and never give our social security number until we have made a choice among lenders we are considering.

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