When it comes to applying for a mortgage, a car or even an apartment, your credit rating can be one of your best assets – or your biggest obstacles. For this reason, it is important to monitor your credit rating regularly. That way, you will know what to expect when a potential creditor checks your credit rating, and you will be able to spot any errors or identify theft in time to take corrective action.
All loan-related information – credit cards, home mortgages, car loans, lines of credit and so on – is regularly stored by credit agencies. There are three credit agencies: Equifax, Experian and TransUnion. For each account, they track potential red flags from late payments to bankruptcies. A proprietary formula, usually the FICO formula, is then used to calculate an overall score or rating between 300 (extremely poor credit) and 850 (extremely good credit). The average American has a credit rating of 690. All Americans can receive one free annual credit report via AnnualCreditReport.com, and pay for additional reports if desired. Similar programs are available in other countries.
The first reason to monitor your credit rating is that, even if there are no unexpected surprises, is is worth knowing in advance what a potential bank, landlord, or employer is going to see when they check your credit score. According to Bruce McClary of ClearPoint Credit Counseling, “The last place you want to be surprised about your credit score is when you’re closing on your home.” If there are one or two problems in the file, being prepared means you might be able to explain the situation.
Second, even if there has been no fraudulent activity, it is possible that a creditor has reported mistaken information to the credit bureau. This could be erroneous identity information. More seriously, it could be a mistaken indication that you have made late payments, defaulted on a loan or even gone bankrupt. Every credit agency has a process for correcting the situation when erroneous information is added to a credit file. MSN Money reports that some people have even been mistakenly marked dead in their credit files.
Third and most importantly, a regular check-up of your credit rating could be your first warning that you have been the victim of identity theft. Recent data from the Federal Trade Commission and Javelin Strategy and Research indicates that identity theft rates in the United States have recently skyrocketed to more than 12 million cases per year. The fastest-growing categories are the misuse of Social Security numbers on job applications and the filing of false tax returns. However, traditional fraud involves obtaining loans, credit cards, accounts with utilities and so on. In these cases, scammers regularly run up unpaid bills, knowing that they will appear on their victims’ credit reports rather than their own.
Regularly monitoring your credit rating can’t prevent identity theft from happening. There are ways to reduce your risk of identity theft. However, if it occurs anyway, then finding out early by checking your credit rating will give you more time to report the fraud and begin taking the necessary steps to have your record corrected.