Editorial Policy

Why Regular Credit Check-Ups Can Pay Off

Marcia Frellick

October 31, 2012

When it comes to physical wellness, regular check-ups can help keep you active and healthy. That same principle applies to credit, a recent study by TransUnion has found.

According to the credit reporting agency’s October 2012 study of 15 million consumers, those who keep tabs on their credit files open more new credit card accounts and auto loans than those who don’t monitor their reports. Plus, although credit-checkers are more likely to have lower credit scores, they are more likely than expected to pay their loans on time.

These findings suggest that credit checks are connected with savvy credit use — and that credit-checkers with less-than-excellent credit histories may deserve a second chance from lenders.

Active credit-checkers are active credit-users
The TransUnion study looked at consumers who monitored their own credit files from May through October 2009. The study then looked at the new loan accounts opened by these consumers over the following three months and compared them to a control group of non-monitoring consumers over the same period.

Nearly 6.3 percent of consumers who monitored their credit during the study’s time window opened a new credit card account, while only 4.3 percent of those who did not review their credit did so. Likewise, 3.4 percent of consumers monitoring their credit took out car loans, but only 1.9 percent of those not monitoring their credit did so.

The question of why monitoring credit results in using credit wasn’t analyzed in the study, says Ezra Becker, TransUnion’s vice president of research and consulting. But Becker suspects managing your financial health is like managing your physical health.

“If you get engaged in actively monitoring and managing your health, good things generally ensue,” Becker says.

Melinda Opperman, senior vice president at Springboard Nonprofit Consumer Credit Management agrees.

“Your credit score is your financial DNA. …Good credit saves you money, and the consumers in this study understood the importance of a healthy credit profile.”

The study, Opperman points out, could indicate that consumers recognize the need to get a read on their credit before making a major purchase or opening up a new card, a move that could save them thousands.

Two kinds of consumers checking their credit
Those who checked their credit reports in the TransUnion study seemed to break into two camps, Becker says: Those who had less-than-stellar credit and wanted to make repairs, and those who had healthy credit and want to maintain it.

Both groups should be prime targets for lenders, Becker says. But that may come as a surprise to lenders, who tend to see the first group — people with lower credit scores — as a higher risk. In fact, 50 percent of those monitoring their credit had non-prime credit scores (VantageScore credit scores less than 700 on a 501-to-990 scale), compared with 40 percent of the non-monitoring population.

But that’s where another finding in the study comes in, Becker says. Those who end up checking their credit and taking out more loans —  a group that includes more people with lower credit scores — tend to be almost as responsible with the loans as the people who aren’t checking their credit and had higher credit scores.

The study found that the delinquency rates for new credit card accounts and auto loans among those who monitor are just slightly higher than among those who don’t. For instance, the delinquency rate (at least 90 days late) on new credit cards opened by the self-monitoring group was 2.5 percent, compared to 1.9 percent for the non-monitoring population.

“We would have expected higher delinquency rates on the self-monitoring consumers than we saw,” Becker says.

So while their credit may be less than perfect, they are handling the loans responsibly, and lenders should take notice, Becker says. Lenders can always get more customers, he says. But the challenge is in finding customers hungry for credit who are worth the risk.

“These consumers are sending you a signal that they are interested in credit,” and the low delinquency rate shows they’re going to do well in paying their bills, Becker says. Any extra risk in this group may be offset by the sheer volume of people ready to take on credit.

Why checking your credit pays off
So do people who monitor their credit have better credit profiles to begin, with or do they have better credit profiles because they monitor their credit?

“That’s an open question,” Becker says. “But it can’t hurt you to monitor your credit.”

That’s an important point, because a common myth is that monitoring your credit will hurt your credit score.

It’s one thing if the inquiry comes from a lender as a result of you asking for credit — that will ding your credit score.

“But if you’re looking at your own credit, which you have every right to do, those inquiries do not impact your credit score,” Becker says.

Reviewing your credit should be more than a right, Opperman says, it should be high priority for those who want to take control of their financial future.

“Since you can access your credit report free of charge, there is no reason to neglect this important piece of your financial life,” she says.

Under the Fair Credit Reporting Act, you can get a free copy of your credit reports every 12 months from each of the three largest credit reporting agencies (Equifax, Experian and TransUnion). You can request them at AnnualCreditReport.com. Some state laws allow additional free credit reports from each agency.

Beyond making smarter credit- and loan-related decisions, checking your report has other benefits:

Protection against identity theft:  By monitoring your credit health, you help protect yourself against identity theft and minimize any damage if someone steals your information.

“A lot of people only learn they are victims of identity theft when they get the collection calls,” Becker says.

A way to spot credit report errors: Even an incorrect middle initial can signal trouble because it could mean your information has been mixed in with someone else’s. Both the credit bureau and the card issuer (or company that reported the inaccurate information) are required to correct the errors.

Early detection of co-signing problems: If the person for whom you’ve co-signed a loan has late payments or defaults, your credit report will show the damage. You’ve accepted responsibility if the borrower can’t pay, so that person’s bad behavior will affect your ability to get the best terms on a loan of your own.