I recently received a review copy of a book called “Ultimate Guide to a Better Credit Score.” While I hope to do a full review at some point, I thought I’d go ahead and pull out some useful snippets here and there.

First up, let’s tackle the issue of why you should review your credit report. This is actually something that I used to do once per year but, with the availability of free credit reports, I’ve actually started doing it more frequently. Since you get one free report per year from each of the big three credit bureaus, you can now monitor things more regularly by requesting a different report every four months.

With that said, let’s get to the issue of why should you even bother?

(1) Confusion over your name. Do you sometimes go by a shortened version of your name? If so, and if you’ve ever used the different versions when applying for credit, then your report might have some errors. Unless I’m missing something, this isn’t a particularly big deal. Sure, it might cause some stuff to be missing from your report (although it shouldn’t if the bureaus are doing their job). But it’s unlikely to be a source of erroneous negative information.

(2) Wrong person. This is a very real, and potentially very damaging possibility. In fact, it happened to my sister-in-law awhile back. She checked her credit report and discovered that someone with a similar name had defaulted on their car loan in a different state, and it was showing up on her report. Fortunately, this wasn’t a case of identity theft, but it was still a pretty major occurrence in terms of the impact that it had on her apparent credit-worthiness.

(3) Bureau error. Apparently some credit bureaus transcribe your information from tapes or other written records. If the individual doing the transcribing mis-reads a number, or otherwise makes an error, it will show up on your credit report.

(4) Creditor error. I know this may come as surprise to some of you, but creditors are human, too… And they’re not above making honest reporting mistakes, and sending erroneous data to the reporting bureaus.

(5) Incomplete data. The three major credit bureaus don’t share information, so certain information may be reflected on only one or two of your reports. While this could cause positive data to be missing from one or more of your reports, a bigger problem is that you could have negative data on a subset of your reports that you might otherwise miss if you don’t regularly check all three of them.

To this, I would add one of my own:

(6) Identify theft. Keeping track of credit inquiries and what sorts of accounts are being reported in your name is a great way to detect whether or not you’ve been the victim of identity theft before angry creditors come calling.

With the exception of #6, which is always important, it’s most important to protect against #1-#5 if you’re planning on applying for credit in the near future. Maybe you’re planning on buying a house, and need to apply for a mortgage. Or maybe you’re in the market for a new credit card — either because you simply need one, or because you’re hoping to take advantage of a special offer for a 0% balance transfer, free credit card miles, or a cash signup bonus. Whatever the reason, it’s best to know that your credit report is clean before applying.

[Source: Ultimate Guide to a Better Credit Score]