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Score one for consumers like us!

It used to be that individual and household credit ratings were secret, but now you can get easy access to profiles of your credit history that show whether you've met your credit obligations and how quickly you've paid back creditors.

Dolan Smart Money Move: We recommend you check your credit rating (that is, your rating, your spouse's, and your joint rating) once a year through the major credit-reporting agencies in the United States. Not only is this smart, but it's now the law: Everyone has the right to one free credit report per year. Think of this as a checkup on your financial health so that you'll be fully informed as to your qualifications for loans on the big purchases, such as a house, car, or college tuition.

Arming yourself with a credit report is, in fact, part of the pre-qualifying process for loans; if you have a good rating then you're in a position to negotiate for the best terms. And if a catastrophe should ever befall you and cause you to fall back on payments, a good prior credit rating will stand as evidence to creditors that you are reliable under normal circumstances and deserve a break.

With these frequent checkups, you'll also find out if there are any mistakes on your report that need to be cleared up. And just as important in this day and age, it's also a great way to double-check that there's been no identity theft or fraudulent activity affecting your credit rating.

Getting a Copy of Your Credit Report

You can request a credit report directly from any of the three major credit-reporting agencies: Experian (www.experian.com), TransUnion (www.transunion.com), and Equifax (www.equifax.com). The three agencies have also formed a website, www.annualcreditreport.com, where you can make the same request.

Dolan Smart Money Move: We also recommend that you get your credit report through the online service MyFICO.com, which is operated by Fair, Isaac and Co., creator of the FICO score, the credit scoring model that is most widely used to determine a person's credit risk. For $12.95, MyFICO gives you an analysis of your current score in plain English, based on your Equifax credit profile, as well as helpful tips on what specific factors most heavily affected your score and how you can improve it over time. While the credit-reporting agencies can take up to six weeks to send you a report, MyFICO's report is available to you online for 30 days following the order date.

Your report will give you a credit score of 100 to 900. Most U.S. consumers score between 300 and 850. Generally, the higher your score, the more favorably a lender will view your application for credit. The MyFICO report will also tell you where you fit in comparison to other consumers and what this means to lenders.

Bankrate.com, an excellent Web site that offers credit advice in addition to surveys of good and bad credit card rates, recommends checking with all three of the major agencies because each report will have different information. This is due to the fact that credit reporting is a voluntary system and creditors subscribe to whichever agency they want.

If you find that your credit report doesn't list creditors that you always pay on time, you can notify the creditor that you want your good record reported to the credit bureau. By law, the credit issuer is required to respond within a "reasonable time." That's some law-speak and it's the way the laws are written; in plain English a reasonable time should be about 30 days.

How to Read Your Credit Report

An agency credit report contains four sections: identifying information, credit history, public records, and inquiries.

The credit history section is supposed to list your credit accounts and how much you owe on each one, as well as your record for keeping up with payments. Experian's reports will state whether you have a record of paying on time, as well as whether a creditor has ever "charged off" the account; that is, given up on collecting. You will also see payment codes that are the credit industry's long-used method of grading your payment patterns for credit card accounts, installment loans, mortgages, and lines of credit.

The public records section is a place you want to keep blank. It lists finance-related matters such as bankruptcies, judgments, and tax liens. Most of these problems, however, do not stay on the report forever as long as you take care of them.

For example, a Chapter 7 bankruptcy, in which all of your debts are wiped out but your assets are sold and the proceeds distributed among your creditors, is supposed to be cleaned off your record 10 years after the filing date. A bankruptcy filed under Chapter 13, also known as "wage earner's bankruptcy," in which you set up a repayment plan, is usually deleted seven years after the filing date. Less onerous reports, such as late payments or non-payments, settlements, and tax liens, should be deleted seven years after you make good on the problem. An unpaid tax lien can be reported forever, but reporting agencies often delete them 15 years after the filing date.
However, recent changes in the law have made it more difficult to file for bankruptcy.

The final section, inquiries, is a list of everyone who has asked to see your credit report. These are divided into two sections: "hard" inquiries, which you initiate by filling out a credit application, and "soft" inquiries, which come from companies that want to send out promotional information to a pre-qualified group or current creditors who are monitoring your account.

Having a large number of hard inquiries as a result of your applying for credit can affect your rating, because lenders perceive consumers who are seeking several new credit accounts as riskier than those who aren't seeking additional credit. The good news about this, though, is that contrary to a widely held belief, the impact is not that large unless the rest of your credit history is problematic.

Dolan Smart Money Move: If you have been "rate shopping" for a mortgage or auto loan, this action should be counted as a single inquiry. Contact the credit-rating bureau if you've been penalized for your thoroughness with a list of multiple inquiries. Typically, inquiries are purged from the credit bureau files after two years.

Also, you can call Opt Out (888-5OPT-OUT or 888-567-8688), which tells the credit-reporting agencies that you don't want them to sell or rent your name to marketers. Here's one more great reason, as if you need one, to throw out–after shredding!–all of those unsolicited credit card offers that clog your mailbox and nowadays your e-mail box, too. Americans get bombarded with more than 3.5 billion credit card offers a year. Don't succumb to temptation.

Correcting Problems

Brace yourself for a battle because it is not uncommon for reports to have errors. Some lenders estimate that as many as 80 percent of all credit reports contain some kind of misinformation.

Identity theft is a growing problem and, as we talked about, one of the reasons you should check your credit report is to make sure that you aren't taking the rap for someone who has snatched your credit card number and made charges on it. Nothing is more frustrating than cleaning up a credit card account, then getting billed for more charges that you didn't make. Clear that up with the credit card company right away and you won't have to pay anything when you prove that the charges are not yours - but you want to make sure it doesn't haunt you on a credit report. For more information on preventing identity theft, go to www.privacyrights.org.

As if you need it, here's another good reason to winnow down your credit cards. Don't carry around credit cards that you rarely use and if you ever use a card at an ATM machine, pick a personal identification number (PIN) that isn't an obvious set of digits, such as your birthday, that someone could find in your wallet. A PIN should reflect numbers that mean nothing to anyone but you–the date you fell in love with your high school sweetheart or something.

MyFICO's report comes with a form to fill out if your bad credit rating is attributed to an account that isn't yours or a disputed amount. You should also contact the credit company that put the mistake up there and get them to correct it. If they don't correct it within 60 days, or if they disagree with you and won't change it, you have the right to put in an addendum of 100 words saying why that piece of information is incorrect.

The process takes time, because the creditors have 30 days to respond to a charge of a discrepancy. As long as a charge is in dispute, that dispute will still show up on your report.

Dolan Smart Money Move: If you're sitting in front of a loan officer to discuss a car or mortgage loan and you have a bad credit report due to a mistake, tell this person about the problem before you even begin to talk about the loan. Few reports are read by humans now; they're handled almost completely by computers, and computers can't interpret. So the burden falls upon you to show the loan officer exactly what went wrong and why the information is incorrect.

Conclusion

We remember one couple who contacted our radio show that learned the hard way how a credit record of slow payments hits you in all kinds of places. The couple's auto insurance company had just raised their premium for two cars by $200 a year, based on a credit record that put them in a high-risk bracket.

They wanted to know what their credit record had to do with their auto premiums. Well, it might have very little, but it tells insurers and lenders that they are running a risk of getting late payments from you, so they charge you more to give themselves a hedge.

So pay those bills on time and don't forget to check your credit report at least once a year to make sure it's accurate and up to date. It can save you money!

Keep yourself credit smart by reading our other articles here.

And if you want to get smarter about everything money, here's what we want you to do: Sign up for our FREE email tip letter Your Money Matters with Ken & Daria Dolan. It's loaded with advice to make your life simpler and more rewarding – and it's FREE. Click here to sign up now!