Your credit report is an extremely important part of your financial life. It gives potential lenders key information about how you handle credit—such as whether you pay your bills on time and how much debt you are carrying. It enables companies financing vehicles, lending for homes and offering lines of credit determine your risk as a borrower.
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Because it’s so important, it’s important to monitor your credit profiles to know where you stand and to ensure the information is accurate, experts say.
“If a person thinks of their credit report as their financial fingerprint, they will be very interested in confirming that it is accurate,” says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. “The contents of the credit report are used to create your credit score; therefore, it can be critical to a person’s financial future to routinely monitor their credit report.”
1-in-4 Reports Have Errors – This Hurts Your Credit Score
A 2012 FTC study found that about 1 in 4 of Americans have at least one major error on their credit report.
Your credit scores are directly affected by what’s on your reports. And your reports are only as accurate as the information provided to the credit reporting bureaus by your creditors. Creditors make mistakes and reporting errors do happen… often. Some errors that are seemingly minor (for example, an account that doesn’t belong to you) or serious (a false delinquency) that go undetected and undisputed drastically lower your credit scores.
Errors that adversely impact your scores can make it extremely difficult for you to get loan approval, and will cost you thousands of dollars in higher interest payments, and even raise your car, health, or life insurance premiums. On average, a person that corrected a single error led to a 31 point jump in their credit score. The bottom line is, errors on your report cost you money.
The three national credit reporting agencies use the information in your credit report to determine your credit score. In addition to helping determining your risk as a borrower, your score impacts other areas of your life as well. Your score can help insurance companies determine whether to provide you with coverage, how much of a premium to charge you, whether a landlord will rent you an apartment and, in some cases, whether an employer will hire you.
According to Demos, a non-profit public policy organization, nearly half of employers check a potential employee’s credit history when hiring for some or all positions. One in seven low-to middle-income respondents to a Demos survey said they were not hired for a job because of information in their credit report.
Negative information can drag your credit score down, leaving you in a lurch when it comes time to apply for credit, make a large purchase or even apply for a job. By regularly checking your credit report, you can see how your financial decisions impact your credit score and adjust your behavior accordingly.
What to look for when checking your credit report
Checking your credit report can also alert you to erroneous information in your report, which could also have a negative impact on your score and affect your ability to obtain new credit. In some cases, this incorrect information could be a clerical error, but sometimes it could be a red flag for identity theft.
As a summary of your credit history, your credit report will list your name, address and Social Security number; your credit card accounts; your loans; how much money you owe; and your payment history. It’s important to review all of this information to ensure it’s correct.
When you review your credit report, look for the following:
1. New credit inquiries: A credit inquiry is a request to look at your credit file. A soft inquiry is a review of your credit file by a prospective lender, usually as part of a pre-screening process. It has no effect on your credit score. A hard inquiry, on the other hand, generally hits your credit report after you apply for credit. This kind of inquiry will negatively affect your credit score, but only accounts for a small portion of what makes up a score.
When you review your report, keep an eye out for hard inquiries related to credit accounts or loans you didn’t attempt to open. These may be errors, but they could be signs of identity theft.
“All hard inquiries have the potential to negatively impact your credit score—regardless of whether the inquiry was made in error or it’s a legitimate one,” says Judy Sorensen, president of the Association of Credit Counseling Professionals. “Research has shown that each hard inquiry can lower your score by anywhere from 5 points to as much as 35 points or more.”
The impact an inquiry will have on your report is dependent on your credit profile, the length of your credit history and other factors, Sorensen says, but in general, inquiries account for about 10 percent of your overall credit score.
2. New accounts: As with inquiries, scour your report for new accounts you don’t recognize. This includes lines of credit, loans and store credit accounts. Accounts you don’t recognize could indicate that an identity thief has used your personal information to obtain credit. If you do recognize the new accounts, review their impact on your credit score. Opening too many new accounts in a short amount of time can have a negative effect on your credit score.
3. Late payments and collections: Your payment history accounts for about 35 percent of your credit score, so late payments can have a very severe negative impact. Review your payment history on each of your credit accounts. If you see late payments or collections on your report but know you’ve always paid on time, the information could be on your report in error, or could be a sign of fraud.
Identity thieves may use your information to get loans, utility services, and new lines of credit. If the thief doesn’t pay these bills, the collections could wind up on your report. In some cases, thieves may even file bankruptcy in your name.
“A single late payment can drop your credit score by 50 points or more, and in some cases even as much as 100 points,” Sorensen says. “It’s essential to monitor payments on your credit report because mistakes do happen. If your payment history is incorrectly noted on your credit report, you could get denied for a much-needed loan, or have to pay higher interest rates on a mortgage, auto loan, student loan or credit card.”
What to do if you find errors or fraud in your report
Regularly review your credit report for errors to help ensure that lenders see you as a prime borrower. It is also important to have your credit monitored so you receive an alert to changes in your credit file going forward.
If you find mistakes, it can be difficult disputing them with the bureaus unless you have the help of a company that has experience dealing with credit agencies as well as lenders.
Your credit score is too important to ignore. By regularly monitoring your credit report for changes, taking steps to correct errors if they appear, and following up on identity theft red flags, you can put yourself in a position to qualify for new lines of credit—at the best interest rate possible.
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