The Most Important Credit Move You're Probably Not Making

Failing to do this could result in an unpleasant surprise the next time you apply for a loan or credit card.

Do you know the actions to take if you want your credit score to reflect positively on you?

Paying your bills on time, minimizing your credit usage, and applying for new loans and lines of credit sparingly are just a few. But there's another thing you ought to do that's just as important -- if not more so -- yet few people have ever done it. 

I'm talking about checking your credit reports.

These are the records of how you've managed borrowed money in the past and they're what your credit score is based on. They're usually pretty accurate, but mistakes do happen. If you're not on top of them, you could pay the price.

Why you need to check your credit reports regularly

Checking your credit reports is the only way to verify that the credit bureaus have an accurate record of your financial history.

The bureaus receive information from the financial institutions you work with. But sometimes information gets lost or mixed up. A financial institution might fail to report a loan account that's been paid off. The credit bureau might confuse you with someone who has a similar name and include incorrect information in your report.

Checking your credit report can reveal fraudulent accounts opened in your name, too.

Your credit reports can also help you pinpoint any negative information that might hurt your score. This is useful if you're unfamiliar with how credit scoring models work and how your actions can affect your score. By understanding the factors working for and against you, you can make smarter financial choices that will improve your credit score in the future.

How to check your credit reports

Everyone is entitled to one free credit report per bureau per year through AnnualCreditReport.com. You should check your credit reports at least annually.

If you'd like to check them more often, you can buy copies directly from the credit bureaus. Some companies that offer credit monitoring services will get you a copy of your report. Some of these companies may also throw in a free credit score report.

You'll have to provide your Social Security Number to check your reports. Be prepared to answer some identity verification questions, like a street you used to live on or which company handles your mortgage. This takes a little time but ensures that only you can access your credit reports.

What to do if you find an error in your credit report

Most people won't find anything amiss in their credit reports, but if you do, you can dispute it.

Contact the credit bureau and the financial institution in writing and explain what’s wrong. If you have documents that back up your story -- for example, a letter saying your loan account has been paid off and closed when your credit report lists it as open -- send copies of these as well. Request that the information be removed or corrected. Include your contact information in case the credit bureau or financial institution needs to contact you. Request a return receipt so you know when the company receives it.

Once you've disputed an item on your credit report, the credit bureau and financial institution typically have 30 days to investigate your claim. They must make the changes you request if the information in your report is inaccurate.

But the credit bureau can deem your dispute "frivolous." This often happens if there isn't enough information to substantiate your dispute or if you keep disputing the same thing with no extra proof. If it declares your request frivolous, it doesn't have to investigate your claim. However, the bureau must contact you within five days to inform you of its decision.

If the bureau corrects an error in your credit report, it will also notify you and send a free, updated copy of your credit report.

But what if, after an investigation, the company or credit bureau decides not to make any changes to your credit report? You can request that the bureau add a note to your report indicating that you disputed the information. Lenders who pull your credit report will see this and consider it when deciding whether to work with you.

Victims of identity theft should also consider adding a fraud alert to their reports. This tells lenders to take extra steps to verify your identity before opening new credit accounts in your name. And it should hopefully deter future identity thieves.

Checking your credit report only takes a few minutes and it could make a huge difference to your credit score. Dispute any incorrect information right away so that it doesn't hurt you when you try to open up a credit card or take out a loan.