Most people understand that credit is an important topic, but not everyone understands how it really works. Paying your bills on time is important, not just to avoid late fees, but to protect negative information from appearing on your credit report. Everything you do that involves credit is monitored by three credit bureaus, the result of which can have a huge impact on your life.
Credit Monitoring
From the moment you open a credit account, the three credit bureaus---Experian, TransUnion and Equifax---have their eyes on you. They keep track of everything you do, including how much you spend, how close you are to your credit limits and your history of paying on time. Your credit report shows the past seven years of your credit history. This monitoring determines what ends up on your credit report, which influences your credit score.
Consequences of Credit Reporting
The effects of credit reporting are far-reaching. Your credit report is used by many people to make determinations about you; these people include loan officers, landlords and prospective employers. While a positive credit history shows others that you're not a risk for financial mismanagement, a credit report marred with late payments, high balances and collection activity can destroy your chances of getting a car, a house or a new job. You will also be subject to much higher interest rates than those with good credit.
Identity Theft
Perhaps the biggest issue with credit reporting is identity theft, which occurs when a criminal assumes someone else's identity and begins making purchases under that person's name. The criminal ends up with potentially unlimited access to free merchandise, but the victim is left with the fallout, which often includes countless disputes with creditors over purchases he did not make.
While identity theft can ruin an individual who is completely innocent, credit reporting allows victims to show exactly what purchases and past due payments they did not make. Most banks do not require victims of identity theft to make any payments on disputed items; however, the headache of restoring their identities can be extremely stressful.
Consumer Rights
Due to the importance of credit reports and the risk of letting credit reports go unmonitored, all American citizens are allowed free access to their credit reports once per year at www.annualcreditreport.com. Credit reports from each of the three credit bureaus can be pulled once in a revolving 12-month period. You're also entitled to a free copy of your credit report if it was used in part to deny you employment or credit.
Exploitation of Credit Reporting
With many Americans fearing identity theft, credit bureaus and banks have begun selling credit monitoring services. These services check your credit report on a daily basis and alert you to any changes that take place. While these services are beneficial to those who are wary of identity thieves, the services can be misleading. Many advertise their services as being free of charge; however, once your initial trial offer ends, the real membership begins and you're unwittingly charged as much as $15 per month with no advance notice. In addition, though these services give you a credit score, it is only the score that is used by that particular credit bureau. The score provided by these services is not necessarily your actual credit score. The Privacy Rights Clearinghouse does not recommend utilizing these credit monitoring services unless they monitor your reports from all three credit bureaus.
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