If you don’t have a credit history, it’s hard to get a loan, a credit card or even a home. But how are you supposed to show a history of responsible repayment if no one will give you credit in the first place? I can’t think of anyone better than USAA’s very own, JJ Montanaro to help us dig deeper into these questions.
Angela: How is a credit score determined, and who calculates it?
JJ: Well, it depends. How’s that for definitive? But believe it or not it really does. There are literally dozens of different credit score models or calculations created by different companies like FICO or VantageScore. What they all have in common is that they are designed to try to predict if you’re a good risk. Should that car dealer, credit card company, bank or other retailer lend you money? Some models are general and some designed specifically for a car loan, a mortgage or a credit card. The various credit scoring models use data stored by the credit reporting agencies (Experian, TransUnion and Equifax are the biggest) to generate a score. Here’s some information from FICO on how your score is determined, but if there’s a golden rule of credit scoring it’s this: pay on time every time.
Angela: What is the best way to start building credit?
JJ: Dip your toes in the water. Notice, I didn’t say dive in head first! In order to build credit and a good credit history, you’ve got to be in the game. How do you do that? It could be with a low limit credit card, a secured credit card or even a card from a retailer. One misconception I run into all the time is the belief that you have to carry a balance on your credit card in order to build a good history. That’s not the case. When my son left home and joined the Army, he did so with a credit card and our advice: use it once a month and pay it off each month. So far, so good….
Angela: Why are there three credit agencies and why are the score different on all three?
JJ: Credit reporting agencies are a business. And while the “big three” are the most well-known, they aren’t the only three places where your credit history and activity is stored. The analogy I’d use is this: they are a warehouse that stores everything that’s been delivered to them regarding your use of credit. What type of things do they store? Payment history, balances, credit inquiries (when you apply for credit), bankruptcies, court proceedings and the like may all be stored in the “warehouse”. Remember, your score is a function of the data that is used to create the score and not all creditors (stores, banks, etc.) report information to all credit reporting agencies. So, you could definitely have a different score based on what data was used. Generally, my experience has been that while the scores will vary based on which reporting agency supplied the data, they are usually directionally similar.
Angela: What is the best way to keep track of your credit, and how often? Is it necessary to spend money on credit monitoring service?
JJ: Staying on top of what’s happening with your credit should be a regular part of your financial routine. These days, a lot of organizations, including USAA, offer free credit reports and scores to their members or customers. I’m really excited about USAA’s free CreditCheck® service. Of course, you can always check out your free credit report at annualcreditreport.com. However, if you want a score, it typically costs an additional $10-$15. I’d also highlight the importance of checking your credit and credit score months in advance of making any big purchase. You don’t want a nasty surprise when you’re sitting down to purchase a car or apply for a home loan and if there are errors in your report, you may have time to get them fixed.