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Protect your credit-report rights

7 tips to help you avoid pitfalls and manage your credit files

Last updated: September 2012

Illustration: Otto Steininger|threeinabox

Many consumers never peek at their credit reports until driven by desire (for a mortgage or car loan) or panic (credit denial, an insurance rate hike, or identity theft). At that point, they’re forced into a system that might seem more intent on exploiting rather than serving their needs.

If you do a Web search for “credit report,” for example, the big three credit reporting bureaus—Equifax, Experian, and TransUnion—will link you to promotions for their credit-monitoring services, which can cost hundreds of dollars a year, rather than information on how to get your credit report.

Unfortunately, many people are unaware of their credit-bureau rights, according to a survey of ID-theft victims by the Federal Trade Commission released in March. If you’re a victim of ID fraud, or reasonably believe you’re about to become one, you’re entitled to place fraud alerts on your credit reports (they alert potential creditors to verify your identity before extending credit), get a free copy of your file, and block fraudulent information from appearing in your report. Several respondents to the FTC survey complained that when they contacted the bureaus to deal with the theft of their identity, they felt pressured to buy ID-fraud-protection products.

Don’t be taken advantage of by companies that have a lock on your information. Instead, make managing your credit report part of your ongoing financial maintenance. Here’s how:

1. Stay on top of your credit history

Credit reports play a central role in your financial life. They’re used by businesses not only to qualify you for loans and insurance but also to determine what interest rates and premiums you’ll pay. Your credit file is also an important tool for detecting some types of identity fraud.

The information in your credit report is used to develop your credit score, a statistical assessment of your creditworthiness. The information is also used to come up with credit-based insurance scores, which are used by many automobile and home insurers to determine premiums.

Since the 2008 financial crisis, credit-risk analysts have worked to better anticipate how a fiscally unstable world might cause trouble for lenders’ loan portfolios. So FICO, the Minneapolis company whose wide variety of scores are used in an estimated 90 percent of U.S. credit decisions, has created new tools to help lenders estimate how a bigger credit line or deteriorating economic conditions will worsen default risk. As a result, your credit report and score now affect a host of things that may come your way, including automatic credit-line increases or decreases, authorization for you to borrow above your credit limit without hassle, and efforts to pre-empt a strategic mortgage default.

2. Don't pay for credit reports

Credit bureaus sell credit reports, but it’s not always easy to find them. TransUnion, for example, buries its $11.50 report purchase information on its website, beyond the more lucrative credit-monitoring pitches. Equifax and Experian make it easier to find out how to buy their stand-alone reports for $15.95 and $10, respectively.

But save your money. Under federal law, you’re entitled to one free credit report each year from each bureau. On top of that, residents of Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, Vermont, and Puerto Rico are also entitled to a second free annual report from each bureau. Those federal and state laws also apply to your spouse and children ages 13 and up. The one place to order your free reports is at annualcreditreport.com.

You’re also entitled to a free credit report from each bureau after you file a 90-day fraud alert, which you should do every 90 days if you’ve been a victim of ID theft or have a good-faith suspicion that you’re about to become one. That’s because there can be a months-long lag between the loss of your personal data and fraud committed with that information. You’re considered a victim if you’ve ever had a credit card stolen, found unauthorized charges on your bank or credit-card statement or phone bill, received notification of a data-security breach involving your personal information from a company you do business with, or experienced other fraud involving your identity. Even if you’ve been lucky so far, it’s worth assuming that you’re about to become a victim for precautionary purposes, since one in 14 households was hit in 2010, mostly from credit-card fraud, according to the U.S. Department of Justice Bureau of Justice Statistics. 

You can also request a free report if you’ve been turned down for credit or received notice that you didn’t get the best interest rate or insurance premium because of your credit score. So there’s ample opportunity to obtain credit reports free at intervals throughout the year.

3. Resist come-ons for monitoring

The credit bureaus use the lure of free or $1 credit reports or scores to entice you to sign up for credit-monitoring services. Experian does this through several websites, including FreeCreditReport.com, CreditReport.com, CreditCheckTotal.com, and CreditExpert.com.

Credit monitoring offers limited protection. It does nothing to protect against stolen credit cards, and fraudulent accounts can take months to show up in your report. The service can inundate you with alerts about routine changes in your report caused by your own activity. And it won’t detect so-called “fragmented files” created by credit bureaus and kept separate from your files when an ID thief uses your Social Security number with a different name and address to apply for credit.

You can monitor your credit history better by yourself and without paying a fee. Regularly check your credit reports and closely watch your bank, credit-card, phone, and other accounts. Neither the FTC nor consumer groups, including Consumers Union, recommend or endorse credit monitoring.

4. Look for errors on your reports

Once you have your credit reports, comb through them for errors, such as paid-off loans that don’t say so; credit cards that you closed (a good thing) but whose coding says they were closed by a creditor (a bad mark); and bills that you paid but are still listed as collections. Also look for old, harmful information that should have been removed by law—seven years after the fact in most cases, but 10 years after Chapter 7 bankruptcy.

You have the right to dispute erroneous information on your credit report, and the credit bureaus have a responsibility to investigate. You can dispute errors through their websites or by U.S. mail and phone. But it might take more than one try. Among people surveyed by the FTC who attempted to get erroneous information corrected, 42 percent got the job done the first time they contacted the credit bureau, while it took 27 percent two tries, and 24 percent required three to five contacts.

Look for unfamiliar accounts that could be an indicator of ID fraud. If it is fraud, you have the right to have that information blocked from your report if you provide the bureau with a copy of an ID-theft report filed with a law-enforcement agency.

5. Improve your report

You can’t get negative information that’s accurate removed from your credit report, so don’t fall for the promises of costly credit-repair outfits. But you can take steps to improve your report on your own without charge. 

As a general rule, the more recent and consistent your activity is—good or bad—the bigger its impact on your score. So bring any past-due accounts current and pay your debts on time. Use only a portion of your available credit lines. Don’t apply for credit impulsively, such as for store credit cards. Give damaging records—such as bankruptcy, foreclosure, court judgments, and liens—time to age and recede into the past while you demonstrate responsible credit use month after month.

Don’t close an old credit-card account, especially if you have a large credit line and a low balance. If you have only one or two late payments on an otherwise perfect account, ask the lender to remove the blemish with a “goodwill correction.” If you have a good but unreported payment record, ask your creditors to report it.

If your spouse has an excellent payment history on a major credit card, you can become an authorized card user. Bear in mind, too, that a lot of credit inquiries can hurt your score, so if you’re shopping for an auto loan or mortgage, confine it to one 14-to-30-day period.

6. Don't buy the credit score add-on

“Free” credit scores are another lure that credit bureaus use to push credit monitoring. Think about it: If your score comes in lower than expected, the first thing you’ll need to do is examine your credit report. But there’s another reason to just say no to credit scores: The scores sold to consumers are not the same ones used by lenders when making credit decisions. For example, Experian offers a Plus score through its FreeCreditScore.com site when you sign up for a monitoring subscription. But in the fine print the company discloses that the Plus score “is not the score used by lenders.” 

FICO, which has sold 23 million scores to consumers through its myFICO.com site since 2001, suggests that its score is used by 90 of the top 100 U.S. financial institutions to make consumer credit decisions. Unfortunately, the $19.95 FICO score sold to consumers is not the same as the variety of custom, proprietary, and secret scores that FICO sells to lenders.

7. Respond rapidly to ID theft

If you find fraudulent information on your report, act quickly. Contact the creditor to report the fraud and close the accounts, file a police report, and direct the credit bureaus and creditors to block information about the accounts. Thwart crooks by placing a security freeze on all three credit reports (free for victims), which will prevent lenders you don’t already do business with from gaining access to them. That will make it harder for a thief to open new accounts in your name.

CreditKarma: Get what you pay for


CreditKarma.com looks like a steal, which could explain its 6 million users. The San Francisco-based company promises free credit scores, free credit monitoring, and a free “credit report card.” And, the site says, those freebies come “without the sneaky ‘free’ trials or subscription requirements.” But when we dug deeper, we found some caveats:


Scores have dubious value. CreditKarma provides two credit scores—the VantageScore and a TransUnion score—but neither is generally used by lenders in credit-related decisions.


Monitoring is incomplete. CreditKarma’s service is provided by TransUnion and is based on only its credit file. Because each of the three credit bureaus collects different data, all of them should be monitored, assuming you see value in monitoring to begin with. TransUnion charges $200 a year for its three-bureau service.


Your credit report isn’t available. CreditKarma doesn’t give you your credit report. Instead, you get a “credit report card,” which is a summary of your full file.


No free lunch. CreditKarma uses your credit report, along with other personal data, to determine which advertising to display when you’re on its website. So your “free” lunch is paid for by advertisers who want a foot in your door.





   

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