I am a big fan of everybody checking their credit scores at least twice a year regardless of their borrowing needs. The world is a sinister place where greedy corporates go to no ends to crush you for being late on any payments you've made, no matter how small. There are also an endless amount of identity thieves out there who will take advantage of unassuing people.
Some corporates will purposefully let your late payment sit for years before they can come after you because that way, they can tack on huge fees and really rip you a new one when they finally get a hold of you.
Just go ask the IRS what they like to do about erroneous tax returns. They'll wait 3 years to let you know that you made a mistake on your tax returns. In those 3 years, they will have tacked on an usurous interest rate penalty 100X higher than the savings rate you can get in your money market account. Why? Because they can and will bank on your fear to pay the money and shut up!
Why do you think the IRS tax code is 70,000 pages long? To confuse the crap out of you and make you make mistakes so they can assess you penalties! That's right. The world is a sinister place and you need to be protected by educating yourself and consistently checking your credit score at least twice a year to see if it's getting dragged through the mud.
REASONS WHY YOU SHOULD CHECK YOUR CREDIT SCORE REGULARLY
* You plan to buy a house. For first-time home buyers, checking your credit score before your mortgage company checks is particularly important. You are about to buy the most expensive asset of your life and you don't want to be rail-roaded like I was 90 days into the process! Furthermore, you don't want to be embarrassed by your mortgage officer who rejects you after discovering your credit score is too low. If your credit score is below 700 after checking on your own, I would suggest not buying a property until you can get it over 720-740. The average score for a rejected mortgage applicant is 729!
* You plan to refinance your mortgage. If you can refinance your mortgage now, do it! The 10-year yield is at an all-time low at 1.85% in 2015, and you can get 30-year fixed mortgages for under 4%, and jumbo 5/1 ARM rates for 2.75% or lower. The biggest issue is that refinancing your mortgage nowadays still takes FOREVER going the non online route. My latest one w/ Citibank took 100 days, and I thought I was going to blow my brains out after the 90th day. It was a big joke! You don't want to be on the 100th day of your mortgage refinance only to learn later on that some late payment on your credit derails the entire process.
* You plan to buy a car. No matter how hard I try, I don't think the majority of people will follow my 1/10th rule of car buying which states that you should spend no more than 1/10th of your gross income on the purchase value of a car. However, getting a car is a necessity for many, and only a minority of people pay cash for a car. Car lending rates depend on your credit score just like anything else. If the car dealership is charging you more than 3%, with the current 10-year risk free rate at 1.65% (2012) and the Fed Funds rate at 0.25%, you are being charged too much because your credit score is too low.
* You plan to open up a new credit card even though you can't pay in full. Credit cards have the highest borrowing rates around. I've got a 790 credit score and my two credit cards have an interest rate of 10% and 10.5%, respectively. Paying 10% is a ridiculous rate in this current environment given how low prime rates are now. If you have poor credit, you can easily expect your rate to be 15-20%+. If you get in that negative cycle of owning credit card debt, you will experience immense difficulty getting out because your income and rate of return on your money will be way less than your interest rate.
* You want to keep your business partners honest. Whenever you go on credit, you will be charged a certain interest rate that is based on your credit score. Knowledge is power. If the company you are planning to borrow from is charging you an outrageous interest rate, you need to know whether the charge is justified. If you have a 760 credit score and they are trying to gauge you, then you probably should not be purchasing anything from that company! Remember, the business world is a scary place sometimes.
* You want to protect and maintain your good identity. Identity theft seems to be more and more common nowadays. If someone unfortunately gets a hold of your identity, they will likely try and spend as much of your money on credit as possible without getting caught. When they max out your credit, they'll then move on to their next victim. By monitoring your credit score, you have a much better chance of protecting your identity and maintaining your score.
* You might get married. Here's an interesting one which is coming up more often for couples. If you've found someone you plan to spend the rest of your life with, it's best to check your credit score to see if you have room for improvement. Married couples join their finances, and if you have bad credit you might cause trouble for your partner, or your partner might decide to delay marriage or not marry you! Check your credit score early so you can improve on a poor credit score. It takes at least one year, and often up to three years to get back to your previous high.
CHECK YOUR CREDIT SCORE REGULARLY
My credit score is consistently being monitored because I'm in the prime of my career and am paranoid about identity theft. Spending several hundred dollars a year for the piece of mind that my financial information is correct and not being tampered with is worth it. If I was retired and have multiple-millions of dollars in the bank, I would care a little less, because I don't need credit. However, I would still monitor my scores because of identity theft.
You need to check your score at least once a year so you know how you whether you are safe and whether you need to improve. You can check your credit score for free online or with certain credit cards that provide the service. Don't be naive to think that the government and businesses you deal with have your best interest at heart. It just takes one bad move to ruin your finances.
WEALTH RECOMMENDATIONS
* Check Your Experian Credit Score Today: Check your latest Experian credit score straight from their website today. Experian is the most commonly cited of the big three. It's a good idea to see what your credit score is before applying for a loan. If it's below 720, you won't get the best rate, but at least you can spend time to improve your score. Furthermore, 1 out of 4 credit reports have errors, negatively affecting one's credit score. I had a $8 late electric bill that crushed my credit score by 100 points and almost derailed my mortgage refinance. The scary thing is, I had no idea! A FTC study reported that roughly 25% of credit reports have inaccuracies. Check your credit score today.
* Looking for an awesome travel rewards credit card? Check out the Chase Sapphire Preferred® Card and other great rewards cards. I use my Chase credit card for all my business and travel spending to get points for more free travel, insurance in case my bags are lost or my flight is stuck, and more insurance for defective products I buy and want to return. Everybody should have a credit card for the free 30 day credit. Just make sure to pay off your credit card every month in full! Check out some of the benefits:
- Earn 50,000 bonus points when you spend $4,000 on purchases in the first 3 months from account opening. That's a ~$650 value right there.
- Named a ‘Best Credit Card' for Travel Rewards by MONEY Magazine.
- You get 2X points on travel and dining at restaurants & 1 point per dollar spent on all other purchases.
* Get A Free Checkup On Your Finances: Sign up for Personal Capital, the web's #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning Calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I've been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Updated for 2020 and beyond.
Just browsing the older ones and noticed you updated this one quite recently. I always check my credit score, I pretty much know where I am financially but I do it mainly to check for identity theft. Although I take all necessary precautions to protect myself, still pays to be vigilant.
My credit score is consistently being monitored because I’m in the prime of my career and am paranoid about identity theft. Spending several hundred dollars a year for the piece of mind that my financial information is correct and not being tampered with is worth it. If I was retired and have multiple-millions of dollars in the bank, I would care a little less, because I don’t need credit. However, I would still monitor my scores because of identity theft.
FYI I have an automatic update each 3 months through my bank. I thought that gave me all the insight I needed. But I just applied to my bank for a business line of credit, and when I thought (hoped) it would all go fairly smoothly, it came back that I had a lien on my report (for some CA sales tax due from a company I sold a few years back). Totally caught me by surprise – was never notified of this by the State. Now this is delaying my line of credit application (and causing overall general frustration).
Keep an eye on that report!
Thanks again Sam for the great read,
Casey
Yikes Casey. That is exactly why people need to check their credit at least twice a year. It’s amazing how we can have liens and other things on us and not even know it.
Good luck with the process!
I personally check mine at least every year just to make sure everything is on the up and up. You have to be careful nowadays with all the crazy stories you hear about credit theft.
Indeed. Credit theft and identity theft is a SERIOUS problem! We’ve got to be vigilant with our own finances and credit. I wish the government would be vigilant FOR us, but no surprise there’s another thing we don’t get our money’s worth by paying taxes.
Hi Sam,
I’m a new reader (about a month now) and have a question. I’m just getting “in” to the personal finance world and was confused by something you said; spending several hundred dollars a year for piece of mind. I was under the impression that the 3 FICO reports are free (the first time) you do them. If you only do each once a year, you’re still checking your report once every 4 months. How often do you check your credit score? Should I be checking it more than 3 times per year? Also, does checking it often actually lower it?
Thanks!
Taylor
The cost is free if you cancel within the allotted free time. I’ve got a credit score monitoring service that has a monthly fee. To me, it’s worth it, because I’ve got multiple investments and potential investments. I don’t want some mistake screwing me out of tens of thousands in savings, or tens of thousands in potential earnings!
If you don’t have any impending big purchases, and don’t plan to rent an apartment anytime soon, I’d pass on the credit monitoring service. It’s just that when you start really building your asset base and investing in many things where monitoring starts becoming worth it.
I strongly believe the housing market will get better, and is getting better. I wrote on Yakezie.com today why I decided not to sell my house. https://yakezie.com/201995/personal-finance/is-now-the-time-to-sell-my-house/
Good stuff on a cheap car!
I use annualcreditreport.com every 4 months to download a credit report for myself and my wife from one of the 3 reporting agencies, rotating through the 3 each year. In fact, today is the day for my next update. We don’t get the score, but the report has all the relevant info that goes into the score. As long as nothing is out of place, we don’t worry. Further, because we have been buying houses the last couple of years, we get sent a credit score every time a bank runs our credit for a mortgage application. It’s always a competition between my wife and I to see who has the higher score (they’re usually only a few points off from each other in the high 700s or low 800s depending on the reporting service).
The problem with that report is that there is no score. It drove me mad as a landlord, and I’ve got a post in the queue about it.
What do you mean “as a landlord?” did you try using free credit reports to assess your applicants’ credit? But even so, I’d rather have a report without a number than a number without a report if I was evaluating an applicant. But we get actual credit reports for that, and just use the free annual ones for our personal reports.
As a landlord, I want both score and report. It’s like putting your resume with no GPA. Makes you wonder what the prospective tenant is hiding.
I never realized I needed to check my score until, I found a mistake. It took me nearly six months to correct and it wasn’t even my mistake!
Ridiculous isn’t it?! I had NO IDEA for 3 years that I had a blight on my credit report that reared its ugly head when I did my 2012 refinance. If I had known even just last year, I would have fixed it through my utility company for $8 bucks, and I could have saved A LOT of headache!
FS – somewhat off topic comment, If the “Confirm you are NOT a spammer” box is not checked on submitting a comment, the pop up message states that “You may have disabled javascript…”, instead of “Please check the box to confirm that you are NOT a spammer” as is is your source code. I’m not sure if the astute spammer doesn’t figure it out but the early morning coffee-deprived (me) are thwarted.
I gotta look into that. It threw me for a loop too, so hopefully it really throws off spammers!
I humbly disagree with the 1/10th rule. Everyone should buy the most cost-effective car for their personal usage needs. For most people this is probably a slightly used Honda Civic or similar. Someone who earns 40K could spend 12K on such a vehicle, or 4K on a beater following the 1/10th rule. But IF the more expensive car will yield a lower total cost-per-mile than the cheaper car, than that is the one they should buy.
I have to agree with gold666, not to diminish FS’s otherwise sound advice. $50,000/year is good salary outside of the coasts, but a $5000 car (bought as such) is an annuity for your mechanic as soon as it’s bought. Better to buy a $15000 car (used, 2 years old) and keep it for 7 or 8 years and maintain it properly.
Likewise, one could buy a more expensive vehicle and keep it for even longer. We bought a brand new van (only 2nd time in my life I’ve bought a brand new vehicle). It’s now 8 years old, and no signs that we won’t be driving it for another 7-8 years.
Of course, I make sure to get maintenance items done on time (including timing belt recently because it passed 110,000 miles). I don’t exactly want our van breaking down on the side of the road mostly because my wife has between 4 & 6 kids with her in that van.
Here’s a tautology for you: A $14,000 car costs $10,000 more than a $4,000 car.
One can try and justify how a $14,000 car is cheaper than a $4,000 car with XYZABC variables, but nobody knows. Cars are much better made nowadays than in the 1980s.
Or you could buy a good used car for $4,000, not a “beater”. I honestly just wrote about this fact this week, but I love Sam’s 1/10th rule! I have only driven one car worth more than $2,000, and it was my worst performing vehicle with the least options. Do a little research, learn a tiny bit about cars, and you will save that $10,000 every time AND have a more reliable vehicle because YOU KNOW WHAT YOU ARE BUYING. It boggles my mind when people think spending more money on a car makes it more reliable… What makes a car reliable is understanding what you are purchasing and not buying a newer car just because you are scared of automobiles.
FYI, I have a Honda Civic and a Honda Accord. Great performing vehicles for the last 4+ years, no signs of slowing down :)
Good stuff Jacob! But what about your red hot rod truck with neon lights? That surely was more than $2,000!
I drive a “beater” too, b/c a dealer gave Moose a $1,500 trade-in value. An insult! He’s worth at least $3,500!
That was the “one car worth more than $2000”. But it didn’t even have power windows! BUT it did land me a smokin’ hot wife!
I guess I can understand buying a newer, $12,000 can if you are trying to land a smokin’ hot wife. Just make sure to have a sweet sound system and a TV in your ride. Trust me.
Ah, gotcha now.
Actually, I used to have a suped up BMW 5 series with automatically retractable DVD screen player and three killer subwoofers behind the back seats which I had NO idea were there (bought from my friend). BBS rims, black on black, with black tint and the works!
Goo call on the BBS. Those are sweet! And I LOVE the blacked out look on a 5-series! You got 3 subwoofers in your current ride? I’d put them in my honda, but they would rattle the trunk and the car might fall to pieces ;)
My old ride had em.
I didn’t even know until I put down the seats one day!
How many of you have gone to the trouble to put a long-term fraud alert on your credit files? the industry has made it hard to do this – requiring a police report of ID theft (or attempted ID theft) – but this includes someone stealing your credit card #, so most of us would qualify if we went to the trouble. I am considering going to the trouble as this seems the most comprehensive way to protect yourself. That way, the agencies must contact you (typically ont he cell # you provide them) before allowing any new credit accounts to be opened.
Thoughts? Experiences? Advice?
Thanks.
I personally use annualcreditreport. I don’t get a score but I get to see everything on my credit report to ensure it is accurate. You can get 1 free report a year from each of the 3 credit bureaus. I check one every 4 months.
So that’s why I was getting so many credit reports with no score as a landlord during my rental open house last year!
I kept wondering where the credit score was! In the end, I couldn’t get over the fact that none of them had a credit score, as if there was something they were hiding, so I didn’t choose any of them.
Definitely get an actual score Lance.
Sam,
Great reminder.
Like you, I’m also very paranoid about identity theft.
I’m unsure how much credit scores cost in the US, but here in Canada they’re $24.99, and available through 2 different credit reporting companies. The reason why I ask, is you mentioned “spending several hundred dollars a year for the piece of mind”.
And the part about IRS is simply criminal. That’s crazy. In Canada, that’s not the case at all. You get an assessment after your tax, and it tells you what the interest rate in case you can’t pay in full. You always have the option to call, and make arrangements to pay your taxes back in payments you arrange.
Ah, wait until I write my latest tax department/IRS story…. nuts! Power abuse IMO!