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What is Your Credit, and Why is it Important?
When people talk about credit, they're referring to your credit history. This history outlines how you handle your money, including:
-The number of credit cards you have.
-How many loans you've taken.
-Whether you pay your bills on time.
Your credit history assists lenders in deciding whether they want to do business with you. It also helps determine the interest rate they'll apply.
In general, when lenders see that you always pay your bills on time and never accumulate debt beyond what you can afford, they feel more confident about having you as a customer. If they observe late payments, credit card debt, or borrowing more than you can handle, they may doubt your willingness or ability to repay.
Who Cares About Your Credit History?
Lenders, landlords, insurance companies, and potential employers are some examples of those who might be interested in your credit history. Your credit history can make a significant difference when you:
-Apply for a loan or credit card.
-Seek employment.
-Try to rent an apartment.
-Attempt to buy or lease a car.
-Apply for renter's or homeowner's insurance.
Because lenders, landlords, and other businesses care about how you handle your bills and other financial decisions, you should care about your credit too.
How Can You Find Out If You Have Good Credit?
Good or bad credit is based on your credit history. You can find out what your credit looks like by reviewing your credit report.
What's in Your Credit Report?
Your credit report is a summary of your credit history. There are three major credit reporting companies – TransUnion, Equifax, and Experian – that collect credit information and other data about you. In your credit report, you'll find information like:
Your name, address, and Social Security number.
-Your credit cards.
-Your loans.
-How much money you owe.
-Whether you pay your bills on time or have late payments.
-Whether you've declared bankruptcy.
Businesses pay credit reporting companies to use this information to check your credit. For example, they do a credit check before deciding whether to lend you money, issue you a credit card, or rent you an apartment.
Recommendation: Credit reporting companies must ensure that the information they collect about you is accurate, as mandated by a federal law called the Fair Credit Reporting Act (FCRA). However, it's in your best interest to regularly check your credit report to make sure the data is correct. If you find errors, you can dispute them.
How to Get Your Credit Report
You are entitled to receive a free copy of your credit report each year from the three major credit reporting companies: TransUnion, Equifax, and Experian. Some financial advisors recommend staggering the requests throughout a 12-month period to monitor your reports and ensure they contain accurate information. The best way to get your credit report is to:
Visit AnnualCreditReport.com or
Call Annual Credit Report at 1-877-322-8228.
Additionally, the three agencies have permanently extended a program that allows you to check your credit report from each credit reporting company once a week for free on AnnualCreditReport.com.
All U.S. individuals can also obtain six free credit reports per year until 2026 through Equifax's website or by calling 1-866-349-5191. This adds to the free Equifax report (plus your Experian and TransUnion reports) you can get at AnnualCreditReport.com.
What is a Credit Score?
A credit score is a number calculated based on the data in your credit report. It helps businesses predict the likelihood of you repaying a loan and making payments on time. There are various scoring systems, but most lenders use the FICO score.
To calculate your credit score, companies first extract information from your credit report, such as:
-How much money you owe.
-Whether you paid on time or had late payments.
-How long you've had credit.
-How much new credit you have.
Whether you've applied for new credit recently.
Then, through a statistical program, companies compare this information with the credit behavior of others with similar profiles. Based on this comparison, the program assigns you a score, usually ranging from 300 to 850. A higher score means you have "good" credit – businesses believe you represent a lower risk, making it more likely for you to get credit or insurance and pay less for it. A lower score means businesses perceive you as a "poor" credit candidate, making it harder to get a loan or credit card, and if you do, you're more likely to pay higher interest rates.
How to Get Your Credit Score
Unlike your free annual credit report, there is no free annual credit score. Some companies you do business with might offer free credit scores. Other companies might provide a free credit score if you sign up for their paid credit monitoring service. This service checks your credit report for you. Sometimes it's unclear if you'll be charged for the credit monitoring service. So, if you see an offer for free credit scores, scrutinize it to determine if they are charging you for the credit monitoring.
Recommendation: Before paying to get your credit score, ask yourself if you need to see it. Your credit score is based on the data in your credit history, so if you know you have a good credit history, you already know your credit score will be good. You might be interested in knowing your score, but you can decide if you want to pay to get it.
How Can You Protect Your Credit?
Credit Freeze
A credit freeze (or security freeze) is a free way to limit who can access your credit report. If you're concerned that someone might be using your credit without your permission, such as an identity thief or a hacker after a data security breach, placing a freeze on your credit report might be beneficial. With a credit freeze, it's more challenging for someone else to open new accounts in your name. That also means you'll need to temporarily lift the freeze if you apply for credit because many banks and lenders do a credit check before approving new accounts.
Some things to consider about credit freezes:
-Placing a freeze doesn't affect your credit score.
-With a credit freeze, you can still do the following:
-Get your free annual credit report.
Open a new account. To open a new account, you just need to temporarily lift the freeze. Lifting the freeze is free. You can place it back when you no longer need lenders to see your credit.
Apply for a job, rent an apartment, or buy insurance. The freeze doesn't apply to these actions, so you don't need to lift it.
Recommendation: Even if you have a credit freeze, a thief can make changes to your existing accounts. You still need to monitor your bank, credit card, and insurance statements for any unauthorized changes or charges.
To place a free credit freeze on your credit report, contact each of the three nationwide credit reporting companies
Equifax
Equifax.com/personal/credit-report-services
1-800-685-1111
Experian
Experian.com/help
1-888-EXPERIAN (888-397-3742)
TransUnion
TransUnion.com/credit-help
1-888-909-8872
If you request your freeze online or by phone, the credit reporting companies must place it within one business day. They also have to lift the freeze within one hour of your request. If you make your request by mail, the credit reporting company must place or lift the freeze within three business days. Remember that you need to contact all three companies. For more information on credit freezes, read "What You Need to Know about Credit Freezes and Fraud Alerts."
Monitoring Your Credit Report
Because your credit report affects your chances of getting a loan, job, apartment, and more, it's advisable to ensure there are no errors and no one has been misusing your personal information. You can do this in various ways:
Monitor your credit report on your own for free: Request your free credit report and review it to ensure there are no issues or errors. Check for:
-Information belonging to someone else on your report.
-Very old information (especially more than seven years old).
-Incorrect information about your payment history or accounts.
-Accounts you didn't open, indicating potential identity theft.
If you find any information that shouldn't be there, take steps to correct it. Refer to the next section, "How to Correct Errors on Your Credit Report."
Accept free monitoring offered after a data security incident: If your information was exposed due to a data security incident, many companies will offer you free credit monitoring. Take advantage of it. It's an opportunity to receive free assistance in monitoring your credit report and ensuring no one is misusing your personal information. For more information on what to do if your information was exposed in a data security incident, visit IdentityTheft.gov.
Pay for a credit monitoring service: Typically, these services charge a monthly or annual fee. They monitor your credit report and notify you if they spot anything suspicious. Credit monitoring services often alert you when:
-A company checks your credit history.
-Someone opens a new loan or credit card account in your name.
-A creditor or debt collector reports that you're late on payments.
-Public records indicate you filed for bankruptcy.
-There's a legal judgment against you.
Recommendation: Whether you monitor your credit on your own, get credit monitoring after a data security incident, or pay a company to do it, it's crucial to check your credit regularly to avoid surprises. Learn more about credit monitoring in "What You Need to Know about Identity Theft."
How to Correct Errors on Your Credit Report
The information in your credit report affects your chances of getting a loan, job, apartment, and several other crucial aspects of your life. It's essential to ensure that the data in your report is accurate. If you find errors in your credit report, both the credit reporting company and the person, company, or organization that provided the incorrect information are responsible for correcting it. But first, you need to follow some steps:
If there are errors in your credit report but no identity theft:
First, tell the credit reporting company in writing what information you believe is inaccurate. Include copies of documents that support your position. The credit reporting company must investigate your claim and must also contact the business that provided the information to your credit report. (For example, if the inaccurate information is related to your cell phone bill, the credit reporting company will contact your phone company.) If that company finds the information was indeed incorrect, it must notify all three credit reporting companies so they can correct your file.
Second, contact the business that reported the incorrect information to the credit reporting company. Do this in writing. Tell them you're disputing an item on your credit report. Refer to more information and access dispute letter templates.
If your credit report contains errors due to identity theft:
You can block those charges from appearing on your credit report. Start at IdentityTheft.gov, an FTC website where you'll find a personalized recovery plan that guides you through each step of the recovery. On this website, you can also get an Identity Theft Report that you can use to show you didn't incur the debts caused by the identity theft.
Understanding and protecting your credit is essential in today's financial world. Review your credit report, know your score, and take steps to correct errors. By doing so, you'll strengthen your financial position and gain more control over your credit future.