True story: I didn’t check my credit report until I was 25 years old. Not one single time. As a budding financial journalist reporting from the floor of the Chicago Mercantile Exchange, I knew a thing or two about credit and I knew that a credit report was like a financial report card of how you are doing paying off your bills on time and the like (and, as a result, how attractive you are to potential lenders). But still, every time I sat down at my computer to check it, I ended up doing every other little thing I could think of…other than checking it.
Why? Well, two reasons, both which come down to fear. First, I was afraid of picking the wrong site to check my report. There were too many options and I didn’t know who to trust. And second: I was afraid of what my report might say.
When I finally did sign up, I went for a certain site with a very catchy commercial that promised to be “free.” Boy, was that far from the truth! Truth be told, I didn’t even look at the report for about a week after signing up for it. I just assumed it would be terrible. But when I finally did open my report and the credit score the site had collected for me, it was 720, which wasn’t that bad (your credit score ranges from 350, which is very, very bad to 850 which is the best).
Turns out, I had chosen the wrong site to check my report. Read on so you don’t do the same!
- Free credit reports that aren’t free. Checking your own credit is a once-a-year thing. Think of it as your annual financial physical. It’s a common misconception that your credit score will be docked the more it is checked, but let me be totally crystal clear: your score is only affected by the number of times your credit is checked by others (a.k.a. banks), not by you. So go to town checking your score if you want! But you shouldn’t be that hypochondriac who is in the doctor’s office every day. Once per year is fine. And free! There are three official credit reporting agencies: Experian, Equifax and Transunion. Each one provides a yearly free report by law. Yep, the law actually requires that these reports be free, which is the numero uno way to know that anyone charging you for your report is full of hooey. Note, however, that the report doesn’t tell you your numeric credit score. If you want the separate agencies’ scores, or your overall FICO score—which is an average of the three—then you have to pay for it. You’ve probably seen a ton of gimmicks—catchy commercials or random pop-up ads—or a ton of confusing, seemingly official sites when you do a Google search for “credit report.” Buyer beware: these sites operate by getting your credit card information, signing you up, and then making it almost impossible to get anyone on the phone and cancel your membership before they charge you their monthly fee of $19.99 and up. It can take months to finally get the cancellation to go through (in my case, 4 months!) and by that time you may have spent $100 or more on membership fees for a service that was supposed to be “free.” There is only one that offers truly free reports. Uno. One. It’s annualcreditreport.com. (Just keep in mind that while you can always get this yearly report for free, most of the credit bureaus charge a one-time fee of $5 to $15 to give you your credit score. Ugh.) Again, you don’t really need more than the free official reports you get yearly. But continuing with my doctor analogy, if something bad happens, you can (and should) go back in for a visit. That means if you’ve had your credit card stolen or you shopped at a place that was hacked (like Target was in late 2013, putting an estimated 40 million customers’ credit info at risk), then go back for another credit check to make sure everything is a-okay. Pro-Tip: If you apply for a loan, you can ask the lender for a copy of the report and FICO score they pulled so you don’t have to pay for them yourself.
- Banks that offer money to open a new account with them. This has become a relatively common practice for banks to lure you in as a new customer: they’ll give you $50, $100, even $200 for signing up for a new account. Sounds like easy money, right? Wrong. You typically have to wait 6 months to a year for the money to be deposited into your account, and they make you jump through hoops before you can get it, including requiring that you keep a minimum amount of funds in your account at all times. Drop below that amount, even for just a few weeks? You can kiss that $100 signing bonus goodbye. Also, keep in mind that the more accounts you open up, the more thinly you are spreading out your money, which is bad for two reasons. First, there’s that little thing called “compound interest,” a.k.a. the snowball effect. We know that interest is the money you make off an investment (in this case, the money in your savings account). Compound interest is the money you make off the interest on the money you are investing. That means it’s really “interest on interest” which will make your money grow at a much faster rate than regular ol’ interest. So the more money you have in your account, the more interest you’re accumulating, which means the faster your overall wealth will grow in the long-term. If you are spreading your money across too many accounts, then you’re not maximizing your compounding potential and could miss out on making beaucoup bucks. Second, opening too many accounts can put your credit at risk, which we have already seen is a bad idea. Banks and other potential lenders want to see you being responsible with your money; that’s why they check your credit report in the first place. If they see you have a history of opening new accounts willy nilly (and also closing them sporadically) they have less reason to believe you are a stable saver/spender, and your credit score will reflect that lack of confidence. So while that “cash back” perk might be appealing now, you could be missing out on those funds and then some in terms of your lending power down the road.
- Bundle programs that you can’t get out of. These seemingly convenient packages make you pay a lump fee for services (cable, phone, and internet being the best example) but if you want only a few of these services, not all, you can actually end up paying more to get out of them. They have every incentive to keep you in their bundle program, so as not to lose your services to a competitor. (After all, providers have fears, too: for example, that you will like what you see at another provider better and move all of your service needs over to them.) So in order to “break” your bundle, they’ve been known to jack up the prices on your remaining services to make up for it…just enough to aid their bottom line without losing you all together. For example, let’s say you are paying $90.00 for cable, phone, and internet, but are no longer using your landline (as is the case with so many of us nowadays). So you cancel that, but they come back to you with a new plan of $99.99 for just cable and internet. $10 more for less services? Huh? They know you will likely remain with them rather than enduring the headache of switching providers, and now you’re incentivized to just keep your useless landline rather than pay more to drop it. And if you plan to move in the next year or two? Forget about it; these bundled services come with tough contracts to break without paying major cancellation fees. Don’t get sucked into paying for services you don’t use. Instead, look for plan at the outset that offers a short-term contract and allows you to select services a la carte, so you’re only paying for services you’re actually using.
Spending, saving, and monitoring your hard earned money shouldn’t be scary. With a little gumption and due diligence you can avoid the financial trickery—and save money doing it!