Checking Your Credit: The Basics

The start of a new year is a good time to start monitoring your credit report. Since you can receive three free reports each year, you can set up a schedule to regularly review this important information. Contrary to what the ads flitting across your computer screen might say, you don't have to pay anything to keep an eye on your personal financial information and deter fraud or identity theft.

Here's what you need to know about your credit report:

What it is:

Your credit report has information about your mortgage and other loans, and what credit cards you have or used to have. It tells a prospective lender or employer whether you pay on time and whether you have filed for bankruptcy in the past 10 years. The information in your credit report is used to determine your creditworthiness for new loans and credit cards. It also may be reviewed by potential employers, utility companies, insurance companies and others who have financial dealings with you.

Why review it:

You should monitor your credit report periodically to make sure the information is accurate. Mistakes can happen in the reporting process, and you don't want to be penalized for a late payment if you haven't had one.

Your credit report also lets you see if someone has stolen your identity. "Your credit report is Ground Zero for identify theft," says John Ulzheimer, president of consumer education for credit-monitoring firm SmartCredit.com. Someone with access to your personal information can take out a new loan or open a new credit card in your name, make expensive purchases, and fail to make any payments. That information will show up on your credit report.

Get your free report:

You can review your credit report at no cost at annualcreditreport.com. Federal law says you are entitled to one free credit report every 12 months from each of the three main credit-monitoring companies -- Experian, Equifax and TransUnion. That means you can check a total of three times a year -- once with each company. If you have reason to suspect identity theft, you should check all three reports at the same time, Ulzheimer says. But if you just want to monitor your credit history, you might want to schedule periodic checks and view one of the three companies' reports every four months. Put a credit check on your calendar for January, May and September so you won't forget.

Some states allow you additional access to credit reports, Ulzheimer says. If you live in Colorado, Maine, Maryland, Massachusetts, New Jersey or Vermont, you can receive one additional free report from each of the three credit-monitoring agencies each year. If you live in Georgia, you can receive two extra reports from each agency.

Only about 4 percent of free credit reports are claimed each year, Ulzheimer says. He urges consumers to check their reports for free. "It's your right under federal law," he says.

Don't get fooled:

Many other sites appear to offer free access to your credit report. The Federal Trade Commission cautions, however, that most sites will only let you see your report after you sign up for ongoing monthly fees that will be charged to your credit card. Some of the sites have titles that are similar to the official sites, or use the word "free" in their name. Annualcreditreport.com is the only official site for obtaining your free report.

What's in a credit report:

It includes your name, address and Social Security number. The report lists current and closed credit accounts. You'll also see any mortgages, home-equity, auto and other loans you have or once had. You'll see your payment history with a description, such as "Paid as agreed," which means your account is current. The report notes late or missed payments in the past seven years. If you've closed an account, the report will note that it was closed at your request.

Reviewing your report:

First of all, you want to make sure there are no errors. You don't want the report to show that you made a late payment when you never have. If you find an error, the website tells you how to get it corrected.

You also should also check the report to make sure no unauthorized new accounts have been opened. That's a sign that someone has stolen your personal information.

Finally, you should review the part of the report that shows who else has seen the report recently. If it's a lender or credit card company you don't recognize, you should inquire further to make sure no one is attempting to open a line of credit in your name. If you suspect fraud, notify the lender or agency involved.

Your credit score:

Your credit report does not show your credit score -- a number derived from your financial information that a bank or other lender uses to determine whether to lend you money. Your credit score depends on factors such as how long you've had a loan or credit card, your payment history and how much of your available credit you have used.

You can pay a one-time fee of about $20 to see your credit score on the credit report site, but you probably don't need to do that unless you're planning to apply for a loan.

How to protect yourself:

If you're worried about identity theft, you can place a "security freeze" on your credit report, which means that the company will ask you for permission before allowing anyone to see the report, except companies with which you already do business. A freeze costs from $5 to $20 each time you place it or lift it. The price depends on the state you live in. A freeze makes it more difficult for someone to use your personal information to get credit in your name.

You can also pay a monthly fee to a credit-monitoring agency to watch your credit report. If a new credit card or loan is opened, the agency will send you an alert, and you can verify that you opened the account yourself, or take steps to thwart an attempted fraud. If you've been a victim of identity theft, you are entitled to place a free 90-day "fraud alert" on your credit report. That lets creditors and potential creditors know that you have been a victim, and it requires them to contact you before granting new credit.

Lynne Domash is an editor at SecondAct.com.

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