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Have you noticed the increase in ads asking you to sign up for credit monitoring services, which will check your credit monthly or even daily?
The credit crunch is causing many of us to track our finances much more closely, which is a good thing. But, unfortunately, many of these monitoring services are taking advantage of our current concerns and vulnerabilities.
Here’s the sad truth about credit monitoring services: They’re a rip-off and using them will lower your credit scores.
How low? Consider George, a young, conscientious man who was a client of a colleague. Four years ago, George was working two jobs, charging small amounts on his three credit cards, paying all his bills in full and on time, and saving as much money as he could to buy his first home. Because he was committed to creating an excellent credit history, he subscribed to a credit monitoring service. The popular program invited him to check his credit as often as he wanted. When he enrolled, his credit scores were in the mid-700s, which would have qualified him for the best mortgage financing.
The credit monitoring service didn’t tell George that each time his credit is checked by a third party – that’s any agency other than the credit bureau supplying that specific credit report – points are deducted from his credit scores. Nowhere in the small print of the agreement he signed was there any hint of consequences for frequent credit checks.
He began to look at his credit every day. George noticed that his scores were decreasing and asked the credit monitoring service why this was happening. He was told that credit ratings vary widely at different times of the month and they would reset where they belonged. He continued to check it every day, watching it plummet through the 600s and down into the 500s in a little more than a month.
George had no idea how serious his situation was until he called my colleague, a mortgage broker, to ask what was happening. In about five weeks, his daily use of the credit monitoring service destroyed his pristine credit. With scores in the high 500s, he had fallen from qualifying for the lowest available interest rates into the realm of the worst subprime products. It would take a full year to get his credit rating back.
Here’s what George should have done. There are three major credit reporting agencies, also known as credit bureaus: Equifax, Experian, and TransUnion. Under the Fair Credit Reporting Act, George is entitled to receive a free credit report from each of these agencies once a year. He should do this by going to http://www.annualcreditreport.com. George should have requested copies of his credit reports from each agency, checked them for accuracy, corrected everything that was wrong, and monitored his reports each year — not each day — to be certain nothing inaccurate appeared.
Keep in mind that if you take a lesson from George, don’t confuse annualcreditreport.com, a consumer service site, with freecreditreport.com, which sells credit monitoring services and credit ratings that are not industry standard FICO scores. With the Experian logo prominently displayed on the freecreditreport.com site, this appears to be an Experian product. It is not. The company licenses the use of the logo.
For most of us, including George, reviewing credit once a year will keep us on top of any inaccuracies that may pop up.