In just the past few months there have been reports of major data beaches to consumer data from a large credit card company and a credit reporting agency no less. And each time we hear one of these reports we are cautioned to “check our credit report”. While many of us, no doubt, have a firm handle on our credit report and credit score and what it all means, for some it may all be a little hazy. So, let’s look at the basics.
A brief history in credit bureau time…
Keeping track of who is credit worthy and who is not is nothing new, even though credit card usage in the US didn’t start en masse until the 1970s. In fact, one of the largest credit bureaus was started in the 1800s in a small grocery store in Tennessee, when the proprietor kept a list of creditworthy customers and sold the list to local businessmen. Before mass use of credit cards and the rise in the power of the credit bureau, borrowers had the opportunity to borrow from, say, a local store, default, and then take themselves and their bad behavior to another store and pretend to not have defaulted before. As you can imagine, that was a losing proposition for lenders and was very bad for business.
Credit bureaus themselves were no angels. Once upon a time, they used their lists to enrich themselves through the selling of consumers’ information, and condoned some collection tactics that were a bit shady. But with the Fair Credit Reporting Act of 1968 limits were set on what credit bureaus could do with consumer data and what information could be placed on records. The credit bureau sharing of consumer credit histories has allowed lenders to manage their losses.
In the 1970’s there was the convergence of increased credit usage with improvements in computer data collection technology. And viola, from that auspicious circumstance sprung the modern credit reporting agency and the credit score.
Scores and scores…
Every time you apply for a credit card (you know, like when you are shopping and they say “If you apply for a store card you’ll get 20% off today”?) or apply for a car loan, home loan, home equity line of credit, business loan, student loan – you name it – if you are asking an institution for a loan the credit bureaus is contacted and all your history of borrowing, banking, even sometimes renting is then shared with the lender. Now, after you have been given the loan, your lender is going to tell on you – every month, whether you were on time, late, missed a payment altogether, and that information is added to your credit report and affects your credit score. Each month millions of bits of data are transferred from lenders to the credit bureaus about consumer borrowing and this is kept on each consumer’s (almost) permanent record.
From the information gathered comes your credit score, or sometimes called your FICO score. Unlike your golf score, the higher the better. The higher your credit score the more credit worthy the credit bureaus consider you and the more favorable the loan terms you are likely to get. And an increased rate of just a few percentage points more could cost you hundreds of dollars over time.
Who are these guys?
Currently, there are three major credit reporting bureaus, Equifax, Experian, and TransUnion. Each work with a different group of lenders, although there is overlap as some lenders use more than one credit bureau. But not only lenders are reporting to the credit bureaus. Reporting your payment information can even extend to bills that go into collections, like doctors or hospital payments. So, even though the credit bureau may not be keeping track of your other bills, like your cell phone bill, the cell phone company may use your credit score to determine whether to sell you service or not.
Should I be monitoring?
There was a time not too long ago when it seemed everyone was jumping on the bandwagon of checking credit – even employers! But since the recession and an update to the Fair Credit Reporting Act there are more restrictions on how and who can run your credit. (Many states, including California, now have a ban on employers checking credit for all but a few circumstances, and they have to get your permission beforehand.) The basic rule of thumb now is, if an entity runs your credit, first off they have to tell you, and second they have to allow you to see what they looked at. Ever applied for a store credit card and then gotten that letter in the mail later letting you know who to contact to see your credit score? This is now mandatory for lenders who deny you credit.
Which brings us to the question, should you be monitoring? In short yes, but unless you are looking to buy a car or home or apply for a small business loan soon you can cruise a little. You do want to keep a general eye on your credit score to make sure it doesn’t dip. There are ways to see your credit score for free through apps on your smartphone or device, Credit Karma and Credit Sesame, are two popular apps. Each bureau has their own app you can download.
Your score is only one part of what you watch. You also want to look at your credit report (how to is, a whole other post!) and see if there are any discrepancies or errors. Every year you can get a report from each of the three reporting agencies – for free! But only through AnnualCreditReport.com. And do check your credit report whenever you can for free or low cost. For instance, when you get one of those letters in the mail telling you that you can obtain a copy of your credit report – do it. Otherwise, there is a cost. Although there are a good number of companies that offer credit monitoring, including the credit bureaus themselves, no one knows your information like you do. You may find it worth it to subscribe to a service that alerts you to inquiries and changes to your credit, but there is no substitute for you looking out for your own interests.