What You Risk by Not Checking Your Credit Report for Mistakes

If you don't check your credit report for mistakes, you could find yourself denied a loan or paying more when you borrow.

Your credit report is like your financial report card. Before you enter into transactions such as borrowing money to buy a home or obtaining auto insurance, the company you're doing business with is going to take a look at that report.

The information in the report -- and the credit score based off that information -- will determine if the company is willing to do business with you. And, if a lender decides to lend you money, the information in your credit report will determine the terms.

Unfortunately, despite the importance of your credit report, far too few of us actually know what lenders see when they check our credit. In fact, a recent Lexington Law report found that only 46% of people check their credit score at least yearly. A full 54% never check it at all.

If you're not checking your credit report every few months, you're taking a big -- and unnecessary -- risk.

What's at risk?

There are two big risks associated with not checking your credit report: the risk you'll miss signs of identity theft and the risk mistakes on your credit report will adversely affect you.

Failing to spot identity theft

If someone misuses your identifying information, they have the potential to do tremendous damage. They could open credit cards in your name, take out loans using your Social Security number, and even get medical procedures charged to you that end up on your medical records.

The longer someone misuses your personal information, the more damage they can do -- and the more issues you'll have to resolve to get your credit report cleared and ensure you aren't responsible for fraudulent transactions. That's why catching identity theft quickly is essential.

Checking your credit report regularly is one of the single best ways you can prevent identity theft. When you check your credit, you'll spot inquiries on your report that are placed every time you apply for new credit. If there are inquiries from lenders or service providers you don't recognize, this is a pretty good indicator your identity has been compromised and your information is being used by someone else.

Your credit report also contains a list of open accounts along with your balance and payment history. When there are accounts you don't recognize or a big balance on a card you don't use, you'll know a thief has utilized your information to obtain credit for themselves.

Finally, you'll be able to see any judgments against you. This can tip you off if the actions of a scammer led to a lawsuit being filed that you lost automatically by not showing up for court.

As soon as you spot any of these signs of identity theft, you can get right to work calling creditors, reporting the theft, and getting the black marks off your credit report -- but you can't do any of these things if you don't check your credit history and find out about the problem.

Mistakes on your report could cause you credit problems

While identity theft prevention is one big reason to check your credit report regularly, it's not the only reason keeping tabs on your credit report card is imperative. You'll also want to take a close look at your credit report on a regular basis so you can identify any mistakes that could hurt you.

Mistakes on credit reports are far more common than most people know, with the Federal Trade Commission reporting that as many as 1 in 5 consumers has an error on at least one of their credit reports.

These mistakes are far from harmless. In fact, the FTC indicates 20% of consumers who found errors when checking their credit were able to increase their credit score enough by getting the error fixed that they moved them to a less risky category of borrowers. By decreasing their risk tier, these borrowers were more likely to get a lower rate on loans.

If you have a mistake on your credit report, you could be denied credit altogether. Perhaps worse, you could be approved for credit but charged a much higher interest rate than you'd otherwise be charged. That's a big problem because you may not even know your loan terms were worse due to a mistake on your credit report you weren't aware of.

When you're charged a higher interest rate, your loan could cost much more -- especially if it's a mortgage, car loan, or other large loan.  For example, if you apply for a 30-year fixed mortgage, the national average interest rates as of September 2018 are 4.454% if your credit score is between 700 and 759 but 4.631% if your score drops to the 680 to 699 range. Over 30 years, a $300,000 loan would cost $11,386 more if a lower score -- caused by a mistake -- led to you paying the higher rate.

And, the more a mistake drops your score, the worse off you'll be.

Don't let your credit report go unchecked

If you don't want to pay thousands more in interest and increase your risk of identity theft, you should check your credit report at least once every few months.

The good news is, you can obtain a free copy of your credit report once per year from each of the three major credit reporting agencies by visiting AnnualCreditReport.com. If you space out your requests, you can check your report every four months without paying a dime -- and you'll always know exactly what's on this important financial report card.