Like it or not, modern life runs on credit. If you have a good credit history — you pay your credit card balance on time, have never defaulted on a loan — then banks and other lenders are more likely to loan you money at lower interest rates. If you have a bad credit history — maybe you defaulted on a mortgage or had a car repossessed — then lenders might reject you for future loans.
That's why it's so important to monitor your credit. When you apply for a loan or a new credit card in the U.S., the lender will pull your credit reports from the three major credit monitoring bureaus: Equifax, Experian and TransUnion. If the information on those credit reports is wrong, or if someone is falsely using your identity to take out loans in your name, then you need to catch those mistakes before your credit is ruined.
The Best Site for a Free Credit Report
The good news is that there are several ways to get free copies of your credit reports. The first is through AnnualCreditReport.com, the one and only website authorized by U.S. federal law to issue free credit reports, no strings attached. Thanks to the Fair and Accurate Credit Transactions Act of 2003 (FACTA), each of the "big three" credit monitoring bureaus are required to provide a free copy of your credit report every 12 months.
Bear in mind that your free credit report will not include your credit score, even though it is calculated from information on your credit report. Your credit score, often called your FICO Score, is a separate proprietary product created by FICO (formerly Fair Isaac Corporation). When government legislation was crafted mandating free credit reports, the credit bureaus lobbied against giving out free credit scores as well, as they were a big source of revenue.
The process for getting your free credit reports from AnnualCreditReport.com is pretty straightforward. You'll be asked to enter your name, recent mailing addresses and Social Security number to locate your reports. Then to confirm your identity, you'll be asked multiple-choice questions about places that you've lived, loans you've taken out and past employers.
The only annoying part is that you'll have to complete the online application three separate times if you want all three reports. But you don't have to request all three reports at once. In fact, one strategy is to stagger the three requests over the course of a year so that you can get updated credit information every four months instead of once every 12 months.
Other "Free" Credit Report Options
There's absolutely no reason to spend money on a credit report. In addition to AnnualCreditReport.com, several companies offer free credit reports and even free credit scores without having to enter any credit card information. Even though they're free, there are some pros and cons to consider.
Credit Karma is probably the best-known of these free credit-monitoring companies. If you sign up with Credit Karma, it will send you free credit reports from TransUnion and Equifax, plus weekly updates of activity on either report.
Credit Karma will also provide you with a free credit score from TransUnion and Equifax. Your credit score is a three-digit number calculated using information on your credit report, like how many open credit accounts you have and how many late payments you've made. Lenders use both the shorthand credit score and fuller credit reports when making loan decisions, so it's useful to know your score — and sites like myFICO will charge you $20 for it.
What are the downsides of Credit Karma? For one thing, you don't get access to a credit report from Experian, but you can still get that once a year via AnnualCreditReport.com. And while Credit Karma won't charge you a dime for its credit-monitoring services, it's not a charity. The company makes money by advertising credit card and loan offers. If you sign up with one of those credit cards or get a car loan through one of the suggest lenders, Credit Karma charges a fee to the bank or other lender.
Basically, by signing up with Credit Karma, you're giving them permission to use your credit and spending data to send you emails and serve you ads. It's not that different from Google or Amazon using your browsing and shopping history to show you targeted online ads, but some people would rather keep their financial information 100-percent private.
What to Do When You Get Your Free Credit Reports
The reason you want access to your credit reports is to make sure that the information on the reports is accurate. And while the vast majority of the information will be the same on each of the three credit reports, it's worth checking each report individually for possible errors.
For example, a credit report might list a credit card account as "open" even though you canceled that card years ago. More damaging is if you're wrongly listed as making late payments or defaulting on a loan or line or credit. Each credit reporting bureau has an online process for challenging and correcting inaccurate information on its reports.
But the top reason for periodically triple-checking your credit reports is to catch potentially catastrophic instances of identity theft. Sadly, it's become common practice for crooks to swipe Social Security numbers and use them to take out credit cards and loans under false names. If that happens to you, the defaulted loan or unpaid credit card bill will end up on your credit report, sullying your credit history.
Thankfully, there are processes for reporting and rectifying cases of identity theft, but they can take months and the earlier you catch the fraudulent activity, the better. The bad news is that it's up to you to police your credit reports for identity theft. Not only should you closely monitor your credit reports, but also take steps to protect yourself against identity theft, like shredding any documents that have your Social Security number and avoiding email phishing scams that try to trick you into handing over your personal information.