The Most Important Credit Move You're Probably Not Making

It only takes a few minutes and it won't cost you anything.

You pay your bills on time, never carry a credit card balance, and never borrow more than you need to. It seems like the foundation for an excellent credit score, but then you apply for a loan or a credit card and get denied. What happened?

It could be the result of a simple miscommunication or a failure to provide information. Or it could be that you forgot to make the most important credit move of all.

Is your credit score based on the right information?

Your credit score is a three-digit grade of sorts that measures your financial consistency and actions over time. It's based on the information found in your credit reports. You have three, one from each of the major credit bureaus -- Equifax, Experian, and TransUnion.

Every time you open a credit card or take out a loan, the account shows up on one or more of your credit reports, depending on which bureaus the lender reports to. The lender updates the credit bureaus about your payment history, credit card usage, and more. All of this data shows up in your credit report, along with data from public records, like accounts sent to collections.

In a perfect world, all of this information would be accurate. Your credit reports reflect your exact payment history and only those accounts that you've actually opened. But this isn't always how it works in practice.

Identity thieves open fake accounts in other people's names all the time and don't pay the bills, tanking an unsuspecting victim's credit score. Lenders don't report that a loan is paid off. They can also confuse you with another person who has a similar name, reporting your information on that person's credit report or vice versa.

Since the bureaus have millions of credit reports to keep track of, errors can go uncorrected forever unless you identify them and speak up.

How do you get your credit report?

It's possible to order your credit reports directly from each of the credit bureaus, but you can also get free reports through AnnualCreditReport.com. Normally, you only get one free report per bureau per year, but during the COVID-19 pandemic, all bureaus are offering free weekly credit reports.

To start, you answer identifying questions to ensure that you're accessing your own report and not someone else's. Once you've done this, you can view your reports. They won't have credit scores on them, but you'll see all the credit accounts listed in your name, as well as information on your payment history and public records.

It's important to go through each credit report carefully, as they can all have slightly different information. Look for anything that appears out of place, like accounts you don't recognize, loans you've already paid off, or incorrect credit card balances.

If all appears right, there's nothing more for you to do. But if you find something wrong, you should correct it right away.

What if you find an error in your credit report?

Finding an error in your credit report can be stressful, but in most cases, you can fix it. The first step is to notify the lender associated with the account and any credit bureaus reporting that account. All three credit bureaus have online dispute forms, and you can also submit disputes by mail or phone.

If you believe you've been the victim of identity theft, consider placing a fraud alert on your credit report as well. This tells lenders they need to take extra steps to verify your identity before opening a new account in your name.

If you have any relevant documentation -- for example, a notice from a bank saying your loan is paid off -- include this documentation in the notice you send to the lender and credit bureaus.

Once you've submitted your dispute, the credit bureau will conduct an investigation. This could take up to 30 days. If it decides your claim is valid and that the incorrect information is hurting your credit score, the bureau must remove it.

Hopefully, you'll never run into this problem. But by looking over your credit reports at least once per year, you can avoid bigger crises when you apply for new credit.