A hard inquiry is an inquiry that occurs when a prospective lender checks your credit report to make a lending decision. Hard inquiries can slightly lower your credit score and will typically stay on your report for two years.
Have you ever got a free annual credit report on your own?
If you’re like most people, you don’t think about your credit score very often, let alone think about getting a free annual credit report. Heck, I used to only think about mine when I was about to apply for an auto loan or a mortgage.
Many people think that checking your score will penalize you by lowering your rating a few points. I grew up hearing that over and over, but I’ve since learned that this is entirely untrue if you run a soft check — more on that in a second.
Others are afraid of what they might find. “What if my score is 500?”
If you don’t know your credit score, you’re not alone. In fact, many people I know don’t know their current credit score, and some have never checked their credit score. According to a post on Lexington Law, 54% of Americans say they never check their credit scores.
In an article published by the Consumer Financial Protection Bureau, approximately 26 million Americans are credit-invisible, meaning they don’t have any credit history with a national consumer reporting agency.
These stats aren’t too surprising, though. Many people think that you only need a good credit score if you’re looking to get a loan or a credit card. But if you keep reading, you’ll see there are several reasons you need a good credit report, especially if you’re looking to improve your personal finances.
But before we get to the reasons for a free credit report, let’s look at a few common misconceptions:
What’s the difference in a credit report and a credit score?
This is a common question, and I never considered the difference before writing this very article.
Your credit score is the three-digit number that you want to get as close to 850 as possible. This number is what most lenders look at initially because it makes it easy to determine risk. To learn more about which scores are bad, good, or great, check out this article from LendEDU.
Your credit report, on the other hand, is a list of all of your open, closed, and delinquent accounts. Think of it as your financial report card. Your credit report is a long list of your financial history that, when combined, helps to form your final score.
What’s the difference between a hard check and a soft check
U.S. News defines the difference between them like this:
A soft inquiry is an inquiry that occurs when a person or company checks your credit report as a background check, like when you check your credit score or a mortgage lender preapproves you for a loan. Soft inquiries can occur without your permission, but don’t worry – they won’t affect your credit in any way.
Top 5 Reasons to get a Free Annual Credit Report
When it comes to setting and achieving your financial goals, knowing your credit score is crucial.
Your credit score can help you or hurt you in many ways, including what jobs you get, how much money you’ll pay in interest over your lifetime, what kind of insurance rates you’ll get, and more!
If you haven’t checked your credit recently, or worse, if you’ve NEVER checked it, then check out these important reasons to get a free annual credit report today!
1. Save Loads of Money
If you’re unfamiliar with the FICO credit scores, they range from 300 which is the worst to 850, which is the best. So, what if you have a super low score and don’t even realize it? The answer is: you could pay way more interest over your lifetime than someone with a good score.
According to a survey from LendingTree, borrowing money with a “fair” credit score (580-669) – compared with a “very good” score (740-799) – could cost you up to $45,000 throughout your life in extra interest charges alone.
Whoa! I don’t know about you, but I’d say it’s worth getting a free annual credit report to avoid paying tons of extra money in interest. I could do a lot with $45,000!
2. Save More Money by Getting Better Insurance Rates
Looking to save even more money? You could find significant savings in your insurance policies if you have good credit.
Believe it or not, in all but three states (California, Hawaii, and Massachusetts) it is legal for insurance companies to use your credit score to help set your insurance rate. Companies have been doing this for about 20 years!
According to at least two studies, a 2003 study done at the McCombs School of Business at the University of Texas at Austin, and a 2007 study by the Federal Trade Commission, it has been shown that there is a correlation between a consumer’s credit score and how much they cost their insurance company in claims.
The lower the credit score, the more money the insurance companies may have to pay out. So, in their minds, it only makes sense that increase the rates on people with lower credit scores. If you’re on the receiving end of this, don’t fret – we can fix it!
If you want to save some money by getting a better rate, start by getting a free annual credit report. You can use the report to identify problem areas in your credit history and work towards improving your score.
3. Rebuild Bad Credit or Fix Credit Errors
Probably one of the most important reasons to get a free annual credit report is to fix a bad credit report or to fix credit errors.
To err is to be human, so perhaps you’ve made mistakes in your financial past – I know I have! When I was younger, I opened far too many lines of credit, and I’ve missed a payment here and there.
Running a credit report can help you identify weak spots in your credit history and start working towards fixing them. There are several ways to do this, but I’ll leave it to Jeff over at Good Financial Cents to walk you through his credit-boosting strategies.
Yes, to err is to be human, but the error that costs you may not be your fault. Sometimes the credit folks on the other end can make a mistake that results in a reduction in your score. Maybe the data gets input incorrectly, or someones else’s credit history is mixed in with yours. Believe it or not, it happens!
Either way, spotting these errors and disputing them is a great way to boost your score. Check out this article on myFICO for a detailed guide on fixing credit errors.
4. Spot Identity Theft
Another fantastic advantage of a free annual credit report is, it helps you spot identity theft, but getting a report annually may not be frequent enough. Typically, one of the first things identity thieves do is open credit cards in your name, run up the balance, and then ditch the card for a new one.
This kind of scam can happen fast, and in many cases, getting an annual report would be too late. Websites like Credit Karma allow you to enroll in Identity and credit monitoring and they will send you a notification if a significant change occurs.
Services like these can help you spot identity theft early on, dispute the charges, and close the accounts. The longer this fraudulent activity goes unnoticed, the more damage it can do and the harder it can become to reverse.
5. Keep Your Score Healthy
So, what if you have a high score? What’s the point in getting an annual report?
The easy answer is: your credit is always changing, sometimes daily, depending on how frequently your creditors are reporting. With the fast-paced, digital world we live in, errors can happen, you can forget to make a payment, and identity theft can strike at any moment.
Just because you have a “perfect” credit score today doesn’t mean it will be there tomorrow. By getting frequent credit reports, you can stay on top of your score and credit history, keeping them healthy for the long haul.
One late payment can drop your score 100 points, and one new credit card can reduce your credit utilization enough to boost your score 100 points. (Crazy, right?) Your credit score is the result of a tricky and sensitive equation, so keeping a close eye on it is always worthwhile.
BONUS. It’s Free, so Why Not?
Okay, so if you’re still not convinced, my last reason for getting a free annual credit report is that it’s FREE and it only takes about two minutes on Credit Karma. So, why wouldn’t you get one? It can’t hurt, right?
If you’re still afraid of what you might find, remember, you can’t fix your score if you don’t know what’s wrong with it. And, if you’re worried that your score is 0, the best place to start is with a free report.
Credit Karma is excellent about providing strategies for boosting your score. In fact, while writing this post, they recommended that I refinance my auto loan for a lower rate which would result in a savings of $1,500 over the life of the loan, so, I applied.
I’m not sure if the refi will provide a better rate, but I’ve got my fingers crossed.
How often is often enough?
We’ve been talking about an annual report, but I also indicated that annually might not be enough to spot identity theft. So, how often is often enough and how often is too often.
For this, I’m leaning on Credit Karma again. They recommend getting a report and checking in on your score at least once per year. However, they also recommend checking your score under special circumstances as well:
- Run a report several months before you take out a loan for a significant purchase to avoid surprises at the bank
- Before you apply for a new job, as many employers check your credit
- To reduce your risk of identity theft
Again, running a soft check on your own will not lower your score, so you can check it as often as you feel comfortable with. If you don’t want to manually check it routinely to keep up on fraudulent activity, sign up for Identity Monitoring for peace of mind.
Over to You
So there, you have it, five reasons that getting a free annual credit report will help boost your other financial goals. Head on over to www.creditkarma.com and get signed up. It only takes a couple of minutes to see your report.
Not a fan of Credit Karma? Try these alternatives instead:
Looking for more information on how to build good credit? Check out this article on CreditCards.com and learn seven basic moves for having a fantastic score!