5 Reasons to Monitor Your Credit

Youโ€™ve probably heard that it pays to stay on top of your credit, but how often does a person really need to pull their credit report?

According to Katie Ross, education and development manager for American Consumer Credit Counseling, at the very least, everyone should take advantage of the free credit report they are entitled to each year. However, generally speaking, she suggests checking your credit report and score every six months or so to make sure youโ€™re in good standing. You can also check your credit score and credit report profile for free as often as you want using Credit.comโ€™s Credit Report Card.

There are also instances where a credit check (and even subsequent monitoring) is particularly important. We break down a few of them.

You Need to Know Your Identity has not Been Compromised

If your credit card and/or other personal information has been compromised due to a data breach, itโ€™s definitely a good idea to pull your credit report. For starters, it can show whether someone has fraudulently used your data.

โ€œCheck to see whoโ€™s been looking at your credit,โ€ Bruce McClary, director of media relations for ClearPoint Credit Counseling Solutions, says, referencing the inquiry section. Hard inquiries stemming from loan applications you yourself did not fill out are often โ€œearly cluesโ€ your identity has been compromised, he adds.

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If you discover youโ€™re a victim of identity theft, itโ€™s a good idea to monitor your credit while the situation is being sorted out so you can report damaging and fraudulent information as it appears.

โ€œYou can also add a fraud alert to your credit report,โ€ Ross says.

Youโ€™ve Never Done so Before

Fraud is definitely one reason why credit newbies should finally go ahead and pull that report, but itโ€™s certainly not the only instance where what you donโ€™t know can hurt you. Studies have found as many as four in five credit reports actually contain errors on them and 25% of these mistakes can be egregious enough to cost someone a loan. Not all errors are related to fraud.

โ€œThere are people that are inputting data and they can make mistakes,โ€ Ross says. โ€œIf that happens you need to make sure you address the problem.โ€

Catching mistakes close to when they appear is especially important since some errors arenโ€™t so easy to fix. You can find more information on how to dispute information with the major credit bureaus in this article.

Youโ€™re Getting Ready to Shop Around for a New Loan

Itโ€™s always a good idea to pull all three versions of your credit report (with the scores included) right before you go shopping for a new loan or line of credit. This will preempt any unwelcome surprises.

โ€œThe last place you want to be surprised about your credit score is when youโ€™re closing on your home,โ€ McClary says. (Many mortgage lenders will conduct a second credit check right before the house changes hands, and fluctuations in your score can affect the loanโ€™s terms and conditions.)

It can also help you gauge whether you should even be in the market for a new loan to begin with, since low credit scores can lead to high interest rates or a rejection. While the rejection itself wonโ€™t cause your score to drop further, the inquiry associated with the ultimately useless credit pull can.

โ€œIf you are planning to purchase a home and you are in a range of 720 or more, youโ€™re in better shape than most,โ€ Ross says. โ€œIf not, looking for ways to improve will be your next step.โ€

Youโ€™ve Co-Signed a Loan with Another Individual

Co-signing occurs when a third-party helps an underbanked or otherwise unqualified borrower get a line of credit with more favorable rates by agreeing to put their name to the loan. The practice is especially common among parents who are helping their child get their first credit card, but can also be used to obtain mortgages or car loans as well.

Some people may not realize this, but co-signers are responsible for upholding the terms and conditions associated with the contract, even if they arenโ€™t actively reaping its benefits. This means any missed payments or, worse, defaults will appear on your credit report and have a negative impact on your score. (On the plus side, the other personโ€™s responsible behaviors can give your score a boost.)

Either way, โ€œyou want to check periodically the primary is paying as agreed,โ€ McClary says. If they arenโ€™t, you may have to intervene to prevent the line of credit from doing big damage to your score.

You Want to Know What You Can do to Improve Your Score

If you suspect your score is not-so-hot, it can help to request a report from one of the three major credit reporting agencies โ€” Equifax, Experian or Trans Union. Most versions of a credit report include information of what line items are helping your score and what line items may be hurting it. This information can also give you a sense of what actions you will need to take in order to send your score upward. For instance, a report might point out your credit-to-debt ratio is too high, which means you should probably pay down any debt youโ€™re carrying on your credit cards.

Often, reports will also break down the major components of all credit scores.

โ€œUnderstand what makes your score up and learn how you can improve in those areas,โ€ Ross says.

Keep in mind, checking your credit consistently wonโ€™t cause your score to drop. Personal pulls are considered soft inquiries and donโ€™t appear on your credit report.

Image: drtel, via Flickr

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