The No-Brainer Credit Move Everyone Should Make Right Now

Spring brings nicer weather and, for many, an opportunity to get a little more organized and tackle projects they've been putting off. You've probably heard of spring cleaning your home, but there's no reason you can't do the same for your finances as well.

If you're looking to improve your financial situation or just get a better idea of where you stand right now, here's one thing you should definitely add to your to-do list.

How's your credit?

Your credit affects your finances in a lot of ways. It determines which credit cards you qualify for, what kind of interest rate you get on a loan, and even whether you're able to get certain jobs or apartments. But a lot of people still don't understand how their credit reports work or where they can access them.

The good news is, it's not difficult to do and it shouldn't cost you anything. The government requires that all three credit bureaus provide you with one free report per year through AnnualCreditReport.com. The credit bureaus have also been offering free weekly reports since the start of the pandemic. You can use these to see how your actions affect your credit over time.

In order to access your credit reports, you must answer some multiple-choice identity verification questions. These could include the name of the bank you have your mortgage through or the name of the street you lived on a decade ago. Once you've done this, you'll have the opportunity to view and save your credit reports.

These reports can be a little confusing if you've never looked at them before. They contain some basic personal information about you as well as the details of every credit account currently in your name. This includes credit cards and loans. It'll list details like your outstanding balance and your payment history.

Credit scoring models take this into account when determining your credit score. You won't receive this with your free credit report, but you can find many companies willing to provide this. FICO, the creator of the most popular credit scoring model (FICO® Score), enables you to purchase credit scores, but some credit card companies may give you access to this information for free. If so, this might be worth checking out as it gives you additional guidance on where you stand.

What should you look for when checking your credit reports?

The most important thing to do when checking your credit reports is to look for anything that's inaccurate. This could include credit accounts you know were closed that are still showing up as open or accounts you don't recognize at all. The latter could be a sign of identity theft.

If you notice any mistakes, it's important to correct them as soon as possible. Notify the credit bureau and the financial institution associated with the account of the situation. If you have documentation supporting your claim -- for example, anything that proves you paid off a loan that's still showing as active -- submit a copy of this as well. The credit bureau will investigate and update your report if it deems this is necessary. It will then send you a new, updated credit report free of charge.

You can also use the information in your credit report to identify areas you could work on to improve your credit score. For example, if you see late payments on your report, that could be a sign you need to come up with a strategy to help avoid this in the future. That could be as simple as setting up automatic payments or it could be more involved and require cutting back spending to reduce your monthly bills.

Other things to watch for include:

• Credit utilization ratio: This is the ratio between your available credit and how much you use. For example, if you have a card with a $10,000 balance and a $2,000 limit, your credit utilization ratio is 20%. Ideally, you want to keep this under 30% to keep your credit score high.
• Number of credit inquiries: Every time you apply for new credit, it adds a credit inquiry to your report. These can lower your score by a few points. It's generally best to avoid applying for new credit too often to reduce the impact this has on your credit score.

Use the information you find in your reports to guide you on how to improve your credit score. If you don't see any obvious red flags, there might be nothing for you to do except continue as you have been. But it's still a good idea to check your credit report annually. Identity theft can happen to anyone, and it's better to find out about it by checking your credit routinely rather than by getting denied for a loan or credit card when you really need it.