People check their own credit for a variety of reasons. Many people want to know that their credit score is, in order to know what to expect when they apply for a loan. Some people check their credit to see how much negative information is on it and when it might go away.
However, there is one reason to check your own credit that is even more compelling than either of those: to find and fix errors.
It's more common than you might think
According to a Consumer Reports survey, 20% of 3,000 Americans polled found a mistake when checking their credit report. These mistakes range from minor errors to serious negative information that can prevent you from getting a loan or even a job.
Unfortunately, too many of these errors go undetected. The same survey found that close to half of the surveyed Americans never check their credit reports for erroneous information.
Quite frankly, this problem does not need to be nearly as widespread as it is. Checking your credit report for errors is easy, and the process for fixing errors typically is not particularly complicated.
Easy to check
When checking their credit report, the most common mistake people make is paying for the service. Under federal law, you are entitled to one free copy of your credit report from each credit reporting agency every 12 months. You could also be entitled to an additional free copy if you have a valid reason, such as being a possible identity theft victim or receiving a recent credit rejection.
Websites promising "free credit reports" are generally trying to sell you some type of credit scoring or credit monitoring service. While some people might find these valuable, they aren't necessary for the purposes of an error check.
The only place to claim your (truly) free credit report is at www.annualcreditreport.com. Beware of imitation sites. The real site will not try to sell you anything, and the process is straightforward. Simply fill out a request form and choose the report(s) you want to see, and you'll be able to view your credit report online right away.
What kind of errors should you look for?
First, look at the identifying information on your report, such as your name, birthday, and address. Common errors here include misspellings and incorrect dates, and these are easy enough to clear up. However, if you find something such as an address you've never seen before, it could be a warning sign that your identity might be compromised.
Next, check your account information. Make sure you recognize all of the accounts on your credit report, and that all derogatory information (such as late payments and collection accounts) actually belongs to you and is accurate. Also, make sure your account information, such as your credit limit, is listed accurately, and that closed accounts are actually listed as "closed."
What to do if you find an error
The process varies depending on the type and severity of the error, but the best place to start is to dispute the information with the credit bureaus. All three credit bureaus have an online dispute process, or you can write a letter if you're more comfortable doing that.
Make sure to include any documentation that supports your claim. For identifying information, this can simply mean including a copy of your driver's license or birth certificate. Incorrect account information can be cleared up by including a current account statement or proof that you closed the account.
In cases of actual identity theft or accounts that aren't yours, the process becomes a little trickier. If you think your identity has been stolen, the first thing to do is to put a security freeze on your credit to prevent additional fraudulent activity. Next, report the situation directly to the lender on the account.
In extreme cases, you might need to contact a lawyer if you're not getting anywhere with the creditors or credit bureaus, but most errors can be cleared up without resorting to such extreme actions.
Why it's so important
Errors on your credit report can make it difficult to secure a loan or other type of credit, and can send your cost of borrowing through the roof. For example, according to myFICO.com, a borrower with a 760 credit score (excellent) could expect to pay about 3.45% interest on a 30-year mortgage, but a borrower with a 650 (fair) might have to pay 4.5%. This may not sound like a big difference, but on a $200,000 mortgage this means about $43,000 more in interest over the life of the loan.
It can even prevent you from getting a job, as most states allow for employers to check their applicants' credit reports and to use the information in their hiring decision.
Since most errors are relatively easy (and free) to fix, it's extremely important to get in the habit of checking your credit reports regularly to make sure they are accurate.