In light of the recent Equifax data breach, I want to share some thoughts on what to do about it and what goes into the calculation of your credit score.

Equifax Data Breach

Let’s start with the security breach. First, this is a great article which summarizes what you need to know. Additionally, here are some key points I think are worth highlighting:

  • You can see if you were potentially impacted by the Equifax breach here. Note, however, that you’re going to get a “no” or a “maybe” answer and not a definitive “yes.” This tool was previously giving inconsistent data, which they say is now fixed. Still, I think it’s better to take some precautions, even if you get a “no.”
  • Equifax is offering one year of free credit monitoring, but I can understand if you’re hesitant to use them to now monitor what was stolen under their watch.
  • Here is information from Equifax via the website they set up specifically to address this incident. You can find links to determine if you were impacted and also to enroll in their credit monitoring offer on this site.
  • The concern is more about someone opening a credit card using your information (and that you don’t know about), not someone buying something on an existing card.
  • Credit monitoring tools, fraud alerts, and/or freezing your credit are all available options to alert you or prevent someone from trying to open a line of credit in your name.
    • Note that alerts don’t stop thieves from using your credit (to open an account, for example). The hope is rather that you will be alerted quickly so you can do something about it before it damages your credit score.
    • A credit freeze is the strongest protection as it usually means new lines of credit cannot be opened, but it does come with small fees, some upfront time, and also an inconvenience the next time you want to apply for credit (in which case you would need to unfreeze or “thaw” your credit). Still, a freeze doesn’t prevent all types of identity theft, such as someone filing a tax return in your name.
    • Note that a freeze and a lock are not the same thing. Some sites make this confusing, but you want the freeze (if you decide to go this route).
    • The article I linked to above does a great job of describing the differences and pros and cons among your various options.
  • Another way to help you monitor your credit is to get your annual credit report (free every 12 months) from www.annualcreditreport.com.
  • Another precaution you can take is to opt out of those annoying pre-approved credit card offers you receive in the mail (so that someone can’t intercept them). Just go to www.optoutprescreen.com. The simplest method opts you out for five years and only takes about 15 seconds. I have done this in the past and, as an added bonus, it also cuts down on junk mail.
  • Finally, some credit cards offer fraud alerts and may provide you with a monthly credit score update. If you have these features as part of your credit cards, this is a good way to stay on top of things. It’s best if they monitor not just that specific card but your overall credit. They may even send you monthly emails letting you know of any changes to your credit score. If your credit score starts to drop each month, this should signal to you that something suspicious is going on. See what your credit cards offer and may already be doing for you for free.

Credit Score

  • Disclaimer: If having a credit card (or cards) leads you to spend more than you earn, avoid having them altogether or keep one card for emergencies only in a block of ice (see tip #2).
  • Your credit is made up of six major areas, though it’s a bit of a black box as to how it’s actually calculated (at least to me and from what I’ve read). The six areas are:
    1. On-time payments
      • Payments made on time and paid in full each month are best (and you can often automate this)
      • Paying the minimum balance is not the same as paying the entire balance – you want to pay off the entire balance each month
      • Your PAYMENT HISTORY and the BALANCES YOU CARRY have the biggest impact on your credit
    2. Duration of credit
      • The longer you have had credit the better (this shows companies you are capable of responsibly having credit)
      • With this in mind, I recommend keeping two cards: the one you have had the longest and the one you like to use for points or rewards
    3. Credit usage
      • The less you use, the better
      • Example: if you have a card with a $15k credit limit it’s better to use $3k a month than all $15k every month
    4. Recent inquiries
      • The fewer the better
      • Every time you try to open a credit card or have your credit run, including cards offered at many retail locations, you credit gets pinged and too many requests lower your credit
    5. New accounts
      • Opening too many new credit accounts in a short amount of time isn’t good either (checking and savings accounts don’t impact your credit, however)
    6. Available credit
      • The more the better, though I don’t think it makes sense to open more cards and/or take on more debt to increase your level of credit
      • Often, you can now request an increase to your credit limit very quickly online for the cards you already have
  • Here’s roughly what credit scores mean to potential lenders:
    • 250 – 579: risky
    • 580 – 669: fair
    • 670 – 739: good
    • 740 – 799: very good
    • 800 – 900: exceptional
  • Finally, there is an art and required organization and discipline to using credit cards to pay for trips, flights, hotels, etc. I only recommend this if you are willing to do the work to stay on top of it all and trust yourself to know you will be able to pay everything off on time and not let it get out of control. I have one friend that I think does this really well, but it is not something I recommend to most people. That said, if you’re interested Travel Miles 101 is where I would start.

 


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