If you’re planning to apply for a new credit card, open a bank account, consolidate debt with a personal loan or buy a home this year, listen up. Before you start shopping around for a lender or checking out credit cards, you need to know where you stand financially first. Cue the personal financial background check.
Chances are if you’ve applied for a job, you’ve been through a criminal background check or even a credit check but a financial background check may be a new concept. Simply speaking, this means taking a deeper dive into your financial details so you have a better understanding of just how creditworthy you are. Not sure where to start? Keep reading for a breakdown of what you’ll need to do.
Start with your credit reports
Your credit reports are a treasure trove of information about your credit and debt. The first thing you’ll want to do is get a free copy of your credit report from the three major credit bureaus: Equifax, Experian and TransUnion. You can get your credit reports online via AnnualCreditReport.com or by contacting the individual credit bureaus directly.
Once you’ve got your credit reports, you’ll need to dig into the details. Start with your personal information and make sure that your name, address and work history are correct and up-to-date. Then, look closely at each of your credit accounts being reported.
Check the account number, balance, creditor name and payment history for each one. Make sure that everything is accurate and take note of any errors or discrepancies. You can initiate a dispute with the credit bureau that’s reporting the information to either have it corrected or removed. Keep in mind that late payments, collection accounts or other negative marks can stick around on your credit for up to seven years if those items are accurate.
Finally, be on the lookout for any accounts you don’t recognize. If you see a credit card or a loan you don’t remember opening, that could be a warning sign of identity theft. You’ll need to give the creditor that’s listed on your report a heads-up right away that you suspect fraud.
Review your credit scores
After you’ve looked over your credit reports, you can move on to taking a peek at your credit scores. In case you don’t know, a credit score is a three-digit number that lenders use to gauge your overall financial well-being. Your credit scores are based on what’s in your credit report and there are two main scoring models that lenders use: FICO scores and VantageScores.
FICO scores are used by 90 percent of lenders while 20 of the top 25 largest U.S. financial institutions rely on VantageScores. Both scores are calculated using a different formula but generally, they factor in the following:
- Payment history
- Your total credit limit
- Available credit
- The amount of credit you’re using
- How often you apply for new credit
- The age of your credit accounts
- What types of credit you’re using
Both scores range from 300 to 850, with 850 being the highest score you can achieve. So how do you get your credit scores? There are a few different ways to do it.
First, you could purchase your FICO scores directly from FICO. This gives you access to your FICO scores for all three of your credit reports. This can be pricey, however, so another option is to see if one of your credit cards offers free FICO score access. If you don’t have a credit card, Discover now offers a free TransUnion FICO score to all consumers. You just have to create a free account to see your score.
If you want to check your VantageScore, the easiest way to do it is to sign up for a free credit monitoring service. These services give you free access to your VantageScore, along with credit alert monitoring which lets you know when a change has been posted to your credit report. That can be useful if you want to keep an eye on your credit on an ongoing basis but you don’t want to pay for your credit report or score each month.
Scan your ChexSystems file
The credit bureaus aren’t the only ones keeping tabs on your financial activity. ChexSystems is a financial reporting service that banks use to verify your identity and your banking history any time you apply for a new checking or savings account.
If you’ve ever bounced a check or had a checking account closed, it can show up on your ChexSystems report if the bank decides to report it That could hurt you down the line if you’re trying to get a new account with a different bank.
To see what’s in your ChexSystems file, you can go online to request a free copy of your consumer report once every 12 months. You can also request your ChexSystems Consumer Score while you’re at it. These scores range from 100 to 899 and the higher your score, the less risky you appear to banks.
Check for judgments and liens
Last but not least, you’ll want to see if there are any serious negative marks hovering in the background, such as judgments or liens connected to unpaid taxes. These things can show up on your credit but they may not if the agency that issued the judgment or lien doesn’t report it to the credit bureaus.
All it takes is a quick phone call to your local courthouse or tax assessor’s office to find out if you have any outstanding liens or judgments. If it turns out that you do, you’ll want to address them as soon as possible, since these kinds of things can cause serious damage to your credit score if they land on your credit report.
Keep an eye on your finances going forward
Once you’ve done a thorough financial background check, you can’t afford to sit around resting on your laurels. Make a point to check your credit report and score periodically so you know how your credit outlook is changing over time. Having that knowledge ahead of time can come in handy the next time you’re ready to apply for a loan.
What should you be on the lookout for in your consumer report? Share with us the alarming or interesting things that you’ve found.