This is part of a series of posts detailing all of the tools I use in my financial ecosystem, from accounts to services. I’ll explain what I use and why.

Like it or not, credit is a very important part of our financial lives. I’m not talking about credit cards, specifically, but credit in the broad sense of the word. In order to get any type of loan from a bank, whether it be a credit card, mortgage, car loan or something else, the entity loaning you the money will often look at your credit report and credit score. These days, even potential employers, with your permission, may pull your credit report to determine if you’re the kind of person they want to hire. It’s important to understand exactly what credit reports and credit scores are and how they can affect you.

In short, a credit report is a collection of information that makes up your credit history. Current and past accounts will be listed, along with opened and closed dates. Payment history on each account will show if you made payments on time, and if not, how late your payments were. Inquiries that have been made into your credit report will also be shown. Age of your credit history and accounts is on this report, as well. This information is reported by the lenders to the three major credit bureaus: Equifax, Experian and TransUnion. Some lenders may not report to all three bureaus. The first time you obtain some type of credit, your credit report will be established and this history will continue building throughout your life. Many people, myself included, before I understood better, think that credit reports are evil, and the entire industry is a scam. As it turns out, these credit bureaus simply collection information and put it into a report that is easy to understand.

Lets move on to credit scores. There are a number of different credit scores floating around these days. The most well known is probably the FICO score. Each of the three bureaus has their own score, as well. Be careful when thinking about purchasing your credit score from the three bureaus, as the ones they sell to consumers are not always the same as the one they’re selling to lenders. What exactly are these scores, you ask? Essentially they’re a numeric representation of your credit worthiness. They take the information from one of your three credit reports and turn it into a number that estimates the likelihood that you will default on your accounts. The lower the number, the less credit-worthy you are. How they determine this is based off of a number of factors, some of which we know, some we don’t. Since these credit scores are products that companies are selling, the exact formulas they use aren’t 100% available to us. We do know some of the major factors that play a part, however. FICO, for example, have published the general categories that make up your score, and how they are weighted. The most important thing you can do to improve or maintain your credit score is to pay your bills on time. The next most important thing is that you don’t run up the balances on your credit cards. Like with the reports, there’s nothing sinister going on here. This is simply a tool used to determine if you’ll be a good debtor or not. If you were going to lend someone else money, you would most likely want to know that your chances of getting your money back were good. The same thing goes for credit card companies, banks, mortgage companies, etc.

Now that we have a basic understanding of credit reports and credit scores, lets take a look at some ways we, as consumers, can keep track of these things and use them to our advantage.

Credit Reports: AnnualCreditReport.com

Thanks to some legislation that went into effect several years back, each of the three bureaus is required to give you a free copy of your credit report once a year. If you haven’t checked your credit report in a while, or at all, I advise you to head over to AnnualCreditReport.com right away. Not only is it good to know what’s in there, but it’s important to check for incorrect information or fraudulent activity. In the past, I’ve typically pulled all three of these reports at the same time. Starting this year, however, I’ve decided to spread them out over a year (one every four months), so that I have a better chance of spotting anything fishy. Unfortunately, as I mentioned earlier, not everyone reports to all three bureaus, so there’s still a chance something bad might go unnoticed for a while. You’ll want to look closely at the accounts listed and make sure that: 1. They are all accounts that were opened by you and 2. They don’t have any incorrect information, such as missed payments. If something doesn’t look right, each report has a section on how to handle incorrect or fraudulent information.

Credit Scores: credit.com, Credit Karma and Credit Sesame

These sites are totally free and will each give you a rough estimate of what they think your credit score is by looking at one of your credit reports. They do what is known as a “soft pull” of you credit report, so it won’t count against you or hurt your credit score in the process. credit.com gives you a letter grade, along with a range that your score would fall into, Credit Sesame gives you a score, and Credit Karma actually gives you two different scores. Understand that none of these is the true FICO score that is most widely used, and they all vary dramatically. For example, credit.com has me as an A (750-850), Credit Karma has me at 718 and Credit Sesame, a 785. I just happen to know that as of last week, my FICO score based on my Experian report is a 798, so you can see the disparity. Don’t think of these scores as completely accurate, but use them as guides to give you an idea of where you stand. If you really want to know your scores, you’ll most likely want to purchase them from myFICO.com. As for the benefits of these free sites, I really like credit.com and Credit Karma because they each break down your score into categories and offer advice on how to improve. Credit Sesame has started doing this as well, but it’s not nearly as robust as the other two.

Right about now, you’re probably wondering why you should care about your credit score at all. Well, in reality, you probably won’t need to for the most part. However, if you’re planning on taking on new debt, such as car loan or mortgage, and you want to get the best rates, you’ll want the highest credit score you can get. Maybe that means delaying the loan application until you can pay off your credit cards, which will dramatically affect your score. We (hopefully) won’t need to take on any new loans any time soon, so for me, monitoring my scores is just something I do for fun. There’s no way that one year ago, I would have ever put “credit scores” and “fun” in the same sentence.

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