Disclosure: This post comes from a guest and contains affiliate links.
Monitoring your credit score is an important component of financial responsibility. It reflects the positive/negative items in your credit report in an easy to understand this three digit number.
It also makes the process of determining a consumer’s creditworthiness relatively easy as compared to manual underwriting.
The difference between a credit score and credit report, however, should be noted. A credit score is influenced by your report. And finding out which category your score belongs in (fair, good, poor) will give you an idea of the status of your report.
Insurance providers, potential employers and banks all rely on information on your credit report to limit risk:
- Banks will reward consumers with ideal financing options as long as they have a history of making timely payments.
- Insurance providers typically create their own score based off your credit report. From this, your premium will either rise or fall depending on various factors they deem noteworthy.
- And a potential employer performs “employment screenings” before hiring. Credit reporting bureaus (Experian, Equifax, and TransUnion) provide reports to employers specifically for this purpose.
Where do credit scores come from?
The biggest player offering credit scores, currently, is the Fair Isaac Corporation (FICO). They produce scores for consumers that range from 300 to 850. VantageScore, a collaboration between all three credit bureaus – comes in second with an identical range.
Many people are not aware of the importance of tracking their credit score until a major purchase arises. Knowing where you stand before applying for a loan or credit is a wise move.
Luckily, there are many credit card issuers (e.g. Discover, Citi, and American Express) that offer a free FICO Score dashboard which reports monthly credit score updates.
Secondly, everyone is allowed to claim a free annual credit report. This way you can identify why your score might not be as good as you had hoped.
Why is it a good idea to monitor your credit score?
1 – Helps in noticing identity theft and errors
Although your credit score can change from month to month, it’s a good idea to check if there are any large dramatic changes. Identity theft can produce a change in your score noticeable enough to require further investigation.
The fact is that stolen identities continue to rise and damage the credit to unsuspecting people. Based off a Javelin Identity Fraud report, 16.7 million people in the U.S. had their identity stolen in 2017. Regularly tracking your score will put you in a better position to address issues quickly as you notice unusual swings.
A major drop could also be a result of an error on your report. You can always file a dispute when something like this occurs. Errors can affect your credit score and cause you to pay more interest than what you deserve.
2 – Assist lenders and insurance companies to determine your risk level
From your credit reports, banks, as well as insurance companies, will be able to figure how risky you are to insure or lend money too. Based on this information, they’ll compensate any loans they offer you with higher (or lower) rates. Your insurance premiums will also be affected not solely on your driving record, but on specific items listed in your report.
They use this information, among others, to determine whether you can be approved. For instance, if you have an average credit rating but a high debt-to-income ratio, you’ll have a lower chance of getting approved compared to someone with the same score but a smaller debt-to-income ratio.
This is the primary reason you should claim your free annual credit report to make sure you’re on the safe side as far as credit scores are concerned.
3 – The trend of your credit score has a significant impact on your job
A potential employer will check your credit history through your report, especially if you work in the financial industry. If you can’t manage your own finances adequately, you might not be the best choice in managing a client’s finances as a financial advisor.
With this being the case, a low credit score can prevent you from getting your dream job despite other qualifications. It’s very disappointing to lack trust with your employer just because you ignored tracking your credit score.
Important things to keep in mind when checking your credit report:
- Make sure delinquent accounts and late payments are not listed in error as you receive the notifications because they’ll negatively affect your credit scores.
- If you have not given either your landlord or your company insurance permission to run your credit, follow up any unauthorized inquiries.
- Last but not least, make sure there are no undetermined transactions in your account since they might result in unlawful activities such as theft.
It is imperative to set some goals for your credit score in your effort to improve. You can view a credit score chart to determine which categories are the most critical. By understanding the importance of monitoring your credit score, you’ll save a lot of money.
I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!