In the United States, every time you apply for a loan, open a credit card, or even start a new job, information is posted to your credit file. These reports tell lenders, utility companies, and potential employers how well you can handle the money. Pay your bills on time and the scores on those credit reports go up; do the opposite, and they go down.
Credit monitoring services help you track changes to your credit reports and let you know whenever something negative is posted that you should be concerned about. They also let you know when it’s time to celebrate because your credit score has improved.
Credit is the ability to borrow money and access goods or services and to understand that you will repay these amounts later. Creditors, which can be a combination of lenders, merchants and service providers, turn to credit reporting agencies to understand a person’s creditworthiness. With greater confidence comes more (and greater) opportunities to borrow, and on better terms.
There are four main categories of credit, including:
- Revolving credit offers a fixed borrowing limit and a minimum monthly payment. If a partial payment is made, the rest of the balance is carried over to the next month. Unspent credit up to the borrowing limit continues to be available, assuming the account is in good standing. One type of revolving credit is well known: credit cards.
- Service credit involves contracts provided by utilities such as in-house service providers and gas companies. Mobile phone companies also offer service credits.
- Installment credit can include everyday loans, including student loans, auto loans, and mortgages. With this type of credit, you agree to pay a fixed amount each month (plus interest) until the balance is paid.
- Charge cards are similar to credit cards, but are usually issued by retailers for use in limited locations. Charge cards do not allow borrowers to carry over a balance each month. Full payment is expected.
What’s in a credit report?
A person’s creditworthiness is determined by three independent credit bureaus, Experian, TransUnion and Equifax. As a starting point, these companies look at a person’s credit history, including how much they have borrowed over the years and whether it has been repaid to lenders as agreed.
Credit report information is voluntarily submitted to the offices of banks, credit card companies, credit unions and other lenders. These same types of businesses and organizations use this information to determine when to lend someone more money or services.
The information contained in a credit report includes:
- Credit cards: how many the person has, borrowing limits, payment history and current balances
- Loans: current and past loans, balances and payment history
- Punctuality of payments: were they made on time, late or missed?
- Financial setbacks: these can include mortgage foreclosures, car seizures and bankruptcies
What are credit scores?
Some potential lenders don’t spend their time digging into someone’s credit report to consider financing. Instead, they rely on a credit rating. The largest, the FICO score, comes from the Fair Isaac Corporation. Some lenders look at the Vantage Score instead.
Statistical analysis goes into creating these scores, and they often differ. Either way, the better a credit report, the higher the credit score. These usually range from 300 to 850 points.
What is Credit Monitoring?
Borrowers can check their credit reports and credit scores using various online tools, both free and paid. A credit monitoring service takes this to a new level by providing the borrower with real-time alerts whenever changes are detected. It is ideal for uncovering potential identity theft, fraud and misreporting. Moreover, by knowing this information, a consumer can quickly alert his creditors of any irregularity.
Identity theft and fraud have increased dramatically over the years as most personal financial data has been transferred online. Hackers can steal consumer names, social security numbers, and other identifying information through data breaches. They, in turn, use this information to steal existing credit cards or open new lines of credit in the name of the unsuspecting victim.
Examples of the type of transactions a credit monitoring service can detect include:
- Opening a new credit account
- Irregular Purchases Paid on an Existing Card
- Late payments
- Closed accounts
- Changes of address
- Other suspicious activity
When looking for the “best” credit monitoring solution, consumers need to weigh the pros and cons of each. The features to look for are the service reports of the three bureaus and the type of customer service they offer.
Some companies now offer credit score simulators, which many find useful. You can play a “what if” game with a simulator and see how a score can change. For example, you can see what happens when a credit card is fully paid or overdue, a new account is opened, or when the size of available credit increases, etc.
Some credit monitoring services also offer a lock option. This feature makes it harder for potential hackers to open a new credit account in someone else’s name when enabled. Yet other services offer dark web analysis, support forums, and more.
Credit monitoring services fall into two categories: free and paid. A good rule of thumb is to identify the most important features and choose a service that best fits those needs. The best solution for some might be to sign up for more than one service to cover all the bases. For example, choose two that are free while subscribing to a paid option.
What Credit Monitoring Services Can’t Do
Credit monitoring services can’t do it all. For example, it cannot protect a consumer against potential theft. It also cannot prevent someone from applying for credit on someone else’s behalf. A monitoring service also cannot correct errors in a credit report.
Regardless of these limitations, credit monitoring services are a valuable tool for anyone looking to stay on top of their financial situation.
You might also consider checking out the best identity theft protection tools of the year.