What’s Your Credit, and Why Does It Matter?
When people talk about your credit, they mean your credit history. Your credit history describes how you use money. It includes factors such as how many credit cards and loans you have, as well as whether you pay your bills on time. Lenders use this information to determine if they want to do business with you and what interest rate to charge you.
If lenders see that you consistently pay your bills on time and manage your debts responsibly, they’ll generally feel more confident doing business with you. However, if they see that you’re frequently late on payments or have significant amounts of debt, they might not trust that you’ll pay them back.
Who Cares About Your Credit History?
Lenders, landlords, insurance companies, and potential employers are a few examples of parties that might look at your credit history. Your credit history can make a big difference when you apply for a loan or credit card, look for a job, try to rent an apartment, or try to buy or lease a car. Because these entities care about how you handle your financial responsibilities, it’s essential to pay attention to your credit.
How Do You Know If Your Credit Is Good?
Determining if you have “good” or “bad” credit is based on your credit history. To find out what your credit history looks like, you can check your credit report.
What’s in Your Credit Report?
Your credit report is a summary of your credit history. The three nationwide credit bureaus — TransUnion, Equifax, and Experian — collect credit and other information about you. In your credit report, you’ll find information such as your name, address, Social Security number, credit cards, loans, outstanding balances, payment history, and if you’ve filed for bankruptcy.
Businesses pay the credit bureaus to use this information to assess your creditworthiness. They run a credit check before deciding whether to extend credit, lend you money, or rent you an apartment.
Tip: It’s crucial to regularly check your credit report to ensure the information is accurate. If you find any mistakes, you can dispute them.
How to Get Your Credit Report
You have the right to get a free copy of your credit report every year from the three nationwide credit bureaus: TransUnion, Equifax, and Experian. Some financial advisors suggest staggering your requests over a 12-month period to keep an eye on your reports and ensure they have accurate information. The best way to get your free credit report is to either go to AnnualCreditReport.com or call Annual Credit Report at 1-877-322-8228.
In addition, the three bureaus allow you to check your credit report from each once a week for free at AnnualCreditReport.com. Moreover, until 2026, anyone in the U.S. can get six free credit reports per year by visiting the Equifax website or calling 1-866-349-5191. This is in addition to the one free Equifax report, as well as your Experian and TransUnion reports, available at AnnualCreditReport.com.
What’s a Credit Score?
A credit score is a number calculated based on the information in your credit report. It helps businesses predict how likely you are to repay a loan and make timely payments. Although various scoring systems exist, most lenders use the FICO score.
To calculate your credit score, companies extract information from your credit report, including your outstanding debt, payment history, credit history length, new credit inquiries, and recent credit applications. Using a statistical program, companies compare this information to the credit behavior of individuals with similar profiles, assigning you a score. Credit scores usually range from 300 to 850, with higher scores indicating “good” credit and lower scores suggesting “bad” credit.
How to Get Your Credit Score
Unlike your free annual credit report, there is no free annual credit score. Some companies may provide free credit scores as part of their services, while others offer them if you sign up for their paid credit monitoring service. Before signing up for any service, ensure that you understand the terms and potential charges for credit monitoring.
Tip: If you know your credit history is good, you may not need to pay to obtain your credit score. However, it can still be interesting to know your score if you wish to monitor it closely.
How Can You Protect Your Credit?
Freezing Your Credit
A credit freeze is a free way to limit access to your credit report. If you’re concerned about identity theft or unauthorized credit use, placing a freeze on your credit report can make it harder for someone else to open new accounts in your name. However, keep in mind that you’ll need to temporarily lift the freeze when applying for new credit, as banks and lenders typically perform credit checks before approving accounts.
Here are a few things to remember about credit freezes:
- A credit freeze doesn’t affect your credit score.
- Despite the freeze, you can still request your free annual credit report, open new accounts by temporarily lifting the freeze (which is free), apply for jobs, rent apartments, or buy insurance.
- It’s crucial to monitor your existing accounts regularly for unauthorized charges.
To place a free credit freeze, contact each of the three nationwide credit bureaus: Equifax, Experian, and TransUnion. You can reach them via their websites or phone numbers. The credit bureaus must place or lift the freeze within specific time frames, depending on your method of contact.
Tip: Even with a credit freeze, it’s essential to monitor your accounts for any suspicious activity.
Monitor Your Credit Report
Given that your credit report affects your access to loans, jobs, apartments, and more, regularly monitoring it is essential. Here are a few ways to do this:
- Monitor your credit report yourself for free: Request your free annual credit report and review it for mistakes or inaccuracies, such as incorrect personal information, outdated information, or accounts you didn’t open.
- Accept free credit monitoring: If your information was exposed in a data breach, many companies offer free credit monitoring services. Take advantage of this opportunity to keep an eye on your credit report and detect any misuse of your personal information.
- Sign up for credit monitoring services: These services usually come with a fee but can provide continuous monitoring of your credit report, alerting you to any suspicious activity. However, remember that you have the right to monitor your own credit and freeze your credit for free.
Tip: Regardless of how you monitor your credit, staying proactive and checking your report regularly is crucial to avoid surprises.
Fixing Mistakes in Your Credit Report
If you find mistakes on your credit report, it’s crucial to take action to ensure the accuracy of the information. The responsibility for correcting errors lies with both the credit bureau and the party that provided the incorrect information. Here are some steps you can take:
- Disputing inaccuracies without identity theft: Inform the credit bureau in writing about the inaccurate information, including supporting documents. The credit bureau is required to investigate your claim and notify the business responsible for the incorrect information. If the business confirms the inaccuracy, all three credit bureaus must correct your file.
- Dealing with errors due to identity theft: If your credit report contains errors resulting from identity theft, you can block those charges from appearing on your report. Start by visiting IdentityTheft.gov, where you’ll receive a personalized recovery plan and an Identity Theft Report that can help dispute fraudulent debts.
By regularly checking your credit report and taking appropriate steps to address any errors, you can protect your credit and ensure accurate financial information.
FAQs
Q: How often should I check my credit report?
A: It’s recommended to check your credit report at least once a year, if not more frequently. Regular monitoring helps ensure the accuracy of the information and allows you to detect any potential issues or fraudulent activity promptly.
Q: How long does negative information stay on my credit report?
A: Negative information generally remains on your credit report for seven years, while bankruptcy filings can stay for up to ten years. Positive information, such as timely payments and responsible credit usage, can remain on your report for longer.
Q: Will checking my credit report affect my credit score?
A: No, checking your credit report does not impact your credit score. This is considered a “soft inquiry,” which does not affect your creditworthiness. However, when you apply for credit, such as a loan or credit card, it may result in a “hard inquiry,” which can influence your credit score slightly.
Q: Can I improve my credit score?
A: Yes, you can improve your credit score over time by practicing responsible credit habits, such as paying your bills on time, keeping your credit card balances low, and avoiding excessive new credit applications. Building a positive credit history takes time, but it’s worth the effort.
Conclusion
Understanding your credit is crucial for making informed financial decisions. By regularly monitoring your credit report, checking your credit score, and practicing responsible credit habits, you can protect your credit and improve your overall financial well-being. Remember, your credit history matters, and taking proactive steps to maintain good credit can have a significant impact on your future financial opportunities.