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Who cares about your credit record? Even if you don't give a hoot, your mortgage broker, insurer, employer, and even your future bride just might. Take 60 seconds to familiarize yourself with this important measure of your fiscal health.
While people talk of your credit report -- and your credit score -- as the end-all-be-all gauge of your money acumen, in reality it is just one measure of your overall financial health. It does not take into account how much you have saved for your retirement or how generous you are to the Salvation Army bell ringer during the holidays. It is simply a snapshot of your borrowing habits used by the lending industry as a quick, objective assessment of consumer risk (or "credit trustworthiness").
When should you check on your credit? You'll hear the once-a-year rule of thumb from a lot of sources. But the most important time to do it is when you know you are going to apply for credit -- especially a big loan for a house or car. As with most things in life, planning ahead can avert last-minute headaches and aneurysm-inducing surprises. Another time to check your credit activity is if you suspect you might be a victim of identity theft.
Your credit record -- or credit report -- is the detailed rundown of your borrowing habits. Credit reports are provided by three major credit bureaus: Equifax, Experian, and TransUnion. (Find out what kind of information is included in their reports -- and see if you're eligible for a free peek.) These agencies keep tabs on various accounts -- past and present -- opened in your name, including credit cards, bank credit lines, mortgages, department store charge cards, and other bills. Unfortunately, all three credit reporting agencies don't necessarily have the same information. So, for a complete record, you need to get your credit rap sheet from all three agencies.
The information on your credit reports is used to calculate your overall credit score -- a sort of GPA of your borrowing history. In many lending situations, the lender bases its decision almost solely on this score. (Most use the score calculated by Fair, Isaac & Co. (referred to as your FICO score), the most popular of the credit scorers.) For years, this score was top secret -- available only to your lender and The Man. Now individuals have access to their FICO score (for a price).
Whatever judgment is passed down upon you by The Great and Wise Credit Scorers, take comfort in the fact that you have unprecedented access to their oracle (the FICO scorecard) and have the power to change your destiny.
Given that your credit record spans nearly a decade of your borrowing activity, it's no surprise that sometimes errors turn up. Some common credit-reporting blunders include out-of-date addresses, closed accounts being shown as open, and outright false information.
For those self-inflicted credit wounds (like a history of late payments, defaults, and generally bad behavior -- think back to your freshman year in college), the best you can do to clear them up is to prove that you've grown older and more Foolish. You cannot wipe out accurate information from your credit report. Nor can any firms who offer to do so for a fee. Your best and only defense is time (most blunders become moot and are removed from your record in 7 years) and proving that you are now a responsible user of credit (pay your bills on time every month).
To track your progress (if you are working on improving your credit score), or to make sure that everything's generally accurate, set a reasonable time to check your credit health, be it a few months or once a year.