Whether or not you have plans to take out a loan or apply for a new credit card sometime soon (not all credit cards are evil), checking your credit score regularly is a smart move. Reviewing your credit score is simply a way to stay informed about how prospective lenders will view you in the event that you do need to take out a loan (perhaps for a home or car), or wish to take advantage of an excellent credit card offer that will lower your credit card interest rate or provide you with valuable cash back or other perks.
Naturally, just knowing your current credit score won’t make any difference in the loan terms, but it can tell you several other very important things. And once you know these things, you may choose to take steps to improve your credit score now, rather than being disappointed and surprised in the future. A little bit of knowledge can be a great motivator in improving your credit score.
Bear in mind though that the credit report that you see isn’t necessarily the same one that potential lenders and creditors will see. They often see a customized version of your credit report, but in most cases it will not differ significantly from the credit score that you see. Also know that when you request your own credit report it does not affect your credit rating. Such a request is called a soft pull and has no effect on the credit rating or credit score. So don’t hold back because you think that pulling your own credit score will damage it.
Here are the three reasons for keeping tabs on your credit report and credit score:
- Finding Mistakes – This is the top reason for regularly monitoring your credit report. According to a recent FTC study, 5 percent of Americans had mistakes on their credit reports that could negatively impact their credit scores, leading to more expensive or restrictive loan terms and even loan denials. Any time you find a mistake on your credit report you want to contact the credit agency and dispute the mistake. This could save you hundreds or thousands of dollars in interest rate charges over your lifetime.
- Know Where You Stand – You should always know where you stand in terms of credit availability. Knowing your score will tell you if potential lenders find you to be an excellent, good, fair, or poor risk. These tiers impact your cost of borrowing, so improving your credit tier will also improve your interest rates and credit terms. It can also save you from applying for credit cards or other loan products that you won’t qualify for, thus protecting your credit score from unnecessary credit pulls. In many cases you will find that the best credit card offers are reserved for those with excellent credit, so strive to make your credit score excellent as well.
- Be Prepared – Preparation is always a good idea and this applies to your credit scores as well. Knowing that you have excellent credit will enable you to take advantage of special offers or deals that come along from time to time. You may be able to qualify for an outstanding cash back card, special introductory rates, or loans that would otherwise be unavailable to you. Remember, while it is admirable to become debt free, sometimes you can use debt as a tool and having the ability to do so when the time is right is one of the keys to profiting from debt, rather than being imprisoned by it.
When checking your credit score and credit history you will want to focus particularly on two factors. The first is the number and frequency of inquiries. Les inquiries is a positive here and by decreasing the number of inquiries or hard pulls on your credit history, you will increase your credit score.
The second thing to look at is the age of each item in your credit history. The longer an item ages the less weight it is given. Unfortunately there isn’t much you can do with this part of your credit history other than being patient.
If both the inquiries and age of your credit history are positive you shouldn’t have a problem when trying to obtain a new loan or credit card, however, if the credit agencies rate either as a B- or lower, you may want to delay any lending activity.
Ultimately, obtaining and reviewing your credit history and credit score once a year is a quick and easy way to monitor the health of your lending capacity. Not taking the time to monitor your credit report may not hurt you, but it certainly won’t hurt you either. And if you are one of the 5% with errors on your credit report you will be glad to have taken the time to review this important metric.