Manage Your Credit

Learning Objectives

In this exercise, you will learn:

• the importance of protecting your credit,
• how to run your personal credit reports,
• why freezing your credit is important, and
• how to freeze your credit.

Video Walkthrough

Use this video to follow along with the steps in this lab.

Protect Your Credit

If you want to rent an apartment, buy a house, use a credit card, or get a job, you should care about your credit score. Many employers will run a credit check on prospective employees in addition to criminal background checks. A bad credit score could indicate that somebody is careless with finances and poses a higher risk of committing financial fraud.

Two of the best ways to improve your credit are to:

1. pay your bills on time, and
2. decrease your credit utilization.

Paying bills on time is fairly intuitive. If you do not pay your bills, creditors will be wary about giving you a loan. Credit utilization is a bit trickier. It is ideal to have a lot of credit available but to use little of that credit. If person A has a credit limit of $2,000 and has a $1,000 balance, they will be using 50% of their credit. If person B has a credit limit of $20,000 and has a $1,000 balance, they will be using 5% of their credit. Even if person A and person B pay their bills on time and never exceed their $1,000 balance, person B will have a better credit score. Try to never exceed 30% of your credit utilization. Ideally, keep utilization under 10%. You can periodically ask your credit card companies to increase your credit limit without impacting your credit score. Just don't use the higher credit card limit to increase your spending just because you have a higher limit. Pay your balance off monthly.

Somebody can steal your information and open an account in your name. These fraudulent accounts can harm your credit score and cause massive headaches. It is important to know what financial accounts are linked to you. The next section discusses how you should monitor your credit for fraudulent activity.

Monitor Your Accounts

Annual Credit Reports

The three credit bureaus--Equifax, Experian, and TransUnion--are required by law to let you review your credit reports from them once per year. The Federal Trade Commission (FTC) gives instructions for getting your free credit report. The easiest way is to go to https://www.annualcreditreport.com/ and follow the instructions. Other websites purport to give you the same information, but some of them really want you to purchase products or services from them.

If you have not run your credit report in the past year, do it now. Make sure that the bank accounts, credit cards, home loans, student loans, and other accounts that appear on your credit report actually belong to you. If something is amiss, start the process of fixing it as soon as possible.

Credit Monitoring Services

Some services will monitor your credit for free. You can get alerts if there is a large change in your account balances, new accounts are opened in your name, etc. Personally, I use creditkarma. Just note that when you sign up for a third-party credit monitoring service, you are giving that service access to sensitive data. The service will know a lot about you, and if you are not paying for the service, they are probably selling your data. So are these services a good idea? There's no clear answer, but I'd rather get more junk mail than have a new credit card opened in my name without me knowing.

Bank Alerts

Most financial institutions now give customers the option to receive alerts for different events. For example, you might choose to receive a text message if there is a purchase over $200 on your credit card or your balance drops below $100. You can enable these alerts for free.

Freeze Credit Report Lookups

Before getting a credit card, home loan, or mortgage, credit-giving companies will run your credit report. These lookups are known as hard lookups that temporarily negatively impact your credit score. It is possible to freeze your credit so that these hard lookups cannot occur. If a company cannot look up your credit, they will (probably) not open a new credit account in your name. Freezing your credit is free. You must freeze your credit at all 3 credit bureaus. Freezing credit does not impact any of your current accounts--you can continue to use credit cards and pay off existing loans.

Note that when freezing your credit, the credit bureaus will try to upsell services. You do not need to pay anything to freeze your credit, though you may need to create an account with the bureau.

• Equifax - Security Freeze
• Experian - Freeze your credit
• TransUnion - Credit Freeze

You can temporarily unfreeze your credit when you need to apply for a loan. Once your loan has been processed, you can freeze your credit again. The default state of your credit should be frozen. Unfreeze your credit only when needed.

Remember that you can still continue to use your credit card, pay your loans, and do business normally while your credit reports are frozen. Freezing your credit only prevents new accounts from being opened in your name.

Credit Freeze Example Scenario 1: Unfrozen Credit

The following fictional scenario shows the type of fraud that can occur when credit reports are not frozen.

• Joe Schmoe has not frozen his credit.
• Joe Schmoe has a checking account and mortgage with Bank of America.
• John Q. Skammer obtains Joe Schmoe's information on the dark web.
• John Q. Skammer goes to a local Bank of America branch and applies for a credit card.
• The branch manager runs Joe Schmoe's credit report through Experian and sees that Joe Schmoe has excellent credit. The branch manager approves the credit card.
• John Q. Skammer charges thousands of dollars on the credit card, but never pays the bills.
• Joe Schmoe receives a letter in the mail telling him that he owes thousands of dollars on a credit card that he never opened.

Credit Freeze Example Scenario 2: Frozen Credit

The following fictional scenario shows the type of fraud that can be prevented by freezing credit reports.

• Joe Schmoe has frozen his credit.
• Joe Schmoe has a checking account and mortgage with Bank of America.
• John Q. Skammer obtains Joe Schmoe's information on the dark web.
• John Q. Skammer goes to a local Bank of America branch and applies for a credit card.
• The branch manager tries to run Joe Schmoe's credit report through Experian. But, the credit report is frozen, so the branch manager cannot evaluate Joe Schmoe's credit risk. The branch manager denies the credit card application. John Q. Skammer is unable to open a credit card in Joe Schmoe's name.

Summary

Freezing your credit is a good idea, but it may not always prevent the opening of fraudulent accounts in your name. Run your credit reports at least annually. Real-time credit monitoring services might be a good idea, though these services become another entity that has access to your data. If fraudulent accounts have been opened in your name, it may be worth paying for enhanced monitoring temporarily to ensure that you are protected.

Challenge

• Spread the word. Tell others how they can monitor and freeze their credit.

Reflection

• Why is protecting your credit so important?
• Credit bureaus have your data. Should they be allowed to track all of this data without your explicit consent?

Key Terms

• Credit Score: A numerical representation of an individual's creditworthiness, typically ranging from 300 to 850. It is calculated based on credit history, including factors such as payment history, amounts owed, length of credit history, and types of credit used. Lenders use credit scores to assess the risk of lending money to a borrower.
• Credit Report: A detailed record of an individual's credit history, compiled by credit bureaus. It includes information such as personal identification details, credit accounts, payment history, inquiries, and public records. Credit reports are used by lenders, employers, and others to evaluate an individual's creditworthiness.
• Credit Freeze: A security measure that restricts access to an individual's credit report, making it more difficult for identity thieves to open new accounts in their name. When a credit freeze is in place, lenders and other entities cannot access the credit report without the individual's permission.
• Credit Monitoring: A service that tracks changes to an individual's credit report and alerts them to potential signs of fraud or identity theft. Credit monitoring services can notify users of new accounts, inquiries, changes in account status, and other significant activities that may impact their credit.