Like it or not, modern life runs on credit. If you have a good credit history – you pay your credit card balance on time, have never defaulted on a loan – banks and other lenders are more likely to lend you money at rates of lower interest. If you have bad credit — maybe you defaulted on a mortgage or you have repossessed a car – lenders may then reject you for future loans.
This is why monitoring your credit is so important. When you apply for a loan or a new credit card in the United States, the lender pulls your credit reports from the three major credit reporting bureaus: Equifax, Experian, and TransUnion. If the information in these credit reports is inaccurate or if someone is falsely using your identity to take out loans in your name, you need to catch those errors before your credit is ruined.
The best site for a free credit report
The good news is that there are several ways to get free copies of your credit reports. The first goes through AnnualCreditReport.com, the one and only website authorized by US federal law to issue free credit reports, no strings attached. Thanks to Fair and Accurate Credit Transactions Act of 2003 (FACTA)each of the “big three” credit reporting bureaus is required to provide a free copy of your credit report every 12 months.
Keep in mind that your free credit report Won’t do include your credit score, even if it is calculated from information in your credit file. Your credit score, often referred to as your FICO score, is a proprietary product created by FICO (formerly Fair Isaac Corporation). When government legislation was drafted mandating free credit reports, credit bureaus lobbied against also giving free credit scores, as they were an important source of income.
The process to get your free credit reports from AnnualCreditReport.com is quite simple. You will be asked to enter your name, recent mailing addresses, and social security number to locate your reports. Then, to confirm your identity, you’ll be asked multiple-choice questions about where you’ve lived, loans you’ve taken, and past employers.
The only annoying part is that you will have to complete the online application three times if you want all three reports. But you don’t have to request all three reports at the same time. In fact, one strategy is to stagger the three inquiries over the course of a year so you can get updated credit information every four months instead of once every 12 months.
Other “Free” Credit Report Options
There is absolutely no reason to spend money on a credit report. In addition to AnnualCreditReport.com, several companies offer free credit reports and even free credit scores without having to enter your credit card information. Even though they are free, there are pros and cons to consider.
credit karma is probably the best known of these free credit monitoring companies. If you sign up for Credit Karma, it will send you free credit reports from TransUnion and Equifax, as well as weekly updates of activity on either report.
Credit Karma will also provide you with a free credit score from TransUnion and Equifax. Your credit score is a three-digit number calculated from information in your credit report, such as the number of open credit accounts you have and the number of late payments you have made. Lenders use both the shortened credit score and more comprehensive credit reports when making lending decisions, so knowing your score is helpful – and sites like myFICO will charge you $20 for this.
What are the disadvantages of Credit Karma? For one, you don’t have access to a credit report from Experian, but you can still get it once a year via AnnualCreditReport.com. And while Credit Karma doesn’t charge you a dime for its credit monitoring services, it’s not a charity. The company makes money by advertising credit card and loan offers. If you sign up with one of these credit cards or get a car loan from one of the suggested lenders, Credit Karma charges the bank or other lender a fee.
Basically, by signing up with Credit Karma, you give them permission to use your credit and spending data to send you emails and serve you ads. It’s not that different from Google or Amazon who use your browsing and purchase history to show you targeted online ads, but some people prefer to keep their financial information 100% private.
What to do when you get your free credit reports
The reason you want to access your credit reports is to ensure that the information in the reports is accurate. And while the vast majority of information is the same on each of the three credit reports, it’s worth checking each report individually for any errors.
For example, a credit report may list a credit card account as “open” even though you canceled that card years ago. More damaging is if you are incorrectly listed as late or in default on a loan, line or credit. Each credit bureau has an online process to dispute and correct inaccurate information on its reports.
But the main reason for periodically triple checking your credit reports is to catch potentially catastrophic cases of identity theft. Unfortunately, it’s become common for scammers to swipe social security numbers and use them to take out credit cards and loans under fake names. If this happens to you, the delinquent loan or unpaid credit card bill will end up on your credit report, sullying your credit history.
Fortunately, there are processes for report and rectify instances of identity theft, but it can take months and the sooner you detect fraudulent activity, the better. The bad news is that it’s up to you to check your credit reports in case of identity theft. Not only should you closely monitor your credit reports, but you should also take steps to protect yourself against identity theft, such as shredding all documents containing your social security number and avoiding phishing email scams that attempt to encourage you to provide your personal information.