When you apply for credit, your potential creditor must assess the odds that they will get their cash back if they lend you money. Your credit report, which contains your credit history, gives that creditor some objective evidence to see how well you have handled debts in the past.
If you were lending money to your brother-in-law, you would assess the likelihood that he would pay you back based on what you know about him and what you have observed. Has he shown himself to be trustworthy in the past? Has he borrowed and paid back money before, even if that money was borrowed from somebody else? Does he usually show good or bad judgment? You would take all of those factors into account before making a decision.
Now assume a stranger asked you for a loan. How would you decide whether to loan money to him or her? You now see the perspective of banks, credit card issuers, and other lenders.
Here are three reasons why you should read your credit report:
1. Make Sure the Information is Correct
If there are any errors in your report that give an inaccurate picture of you — for example, someone with the same name as you has defaulted on a loan and it is erroneously listed under your account — you could be denied credit unfairly. Even if you are given credit, you could pay a higher interest rate because the creditor thinks you pose a bigger risk of non-payment.
Check your information to make sure everything is correct. Errors can leave you unable to secure credit when you really need it, or pay more for the privilege of having it. Over one-quarter of consumers in a recent study found at least one "potentially material" error on a credit report. That means there are tens of millions of credit reports with mistakes. Could one of them be yours?
Don't simply accept errors, even though the path to correct them can be long. Matt Schulz, Senior Industry Analyst at CreditCards.com, advises: "The best way to resolve negative items on your credit report is to just be persistent and to never take no for an answer." If you find errors in your report via Credit Manager, there are Action Buttons available that can easily alert creditors and the credit bureau.
2. Check For Fraud
If your credit information has been compromised, a thief could open up a credit account in your name and rack up large bills before you realize it. Potentially, you could miss payments or default on an account that you don't even know about — ruining your credit for years.
By checking your credit report regularly, you can limit the damage on any fraud that has taken place. Signing up for a fraud alert can make it more difficult for others to open other fraudulent accounts in your name. You may even spot a fraudulent request for credit that was denied, and take action before any damage occurs. If you find fraud in your report via Credit Manager, you can easily alert creditors and the credit bureau with the touch of a button.
3. Honestly Assess Your Creditworthiness
Once you verify that your information is correct, read your credit report as if it belonged to a complete stranger. If you didn't know this person, would you lend money to him or her? Sometimes it can be enlightening to see your credit information laid out in writing.
Is your report short on information? Just as you would be skeptical of a stranger asking you for a loan, a bank or credit card issuer will be wary of lending you money without any way to assess your credit behavior. You will need to create a plan to improve your credit report over time.
The article above is an edited excerpt of the free eBook, Give Yourself Credit. For more information on credit scores and credit reports, download the eBook. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.