What Credit Score Do You Start With?
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Summary:
If you don’t have any credit accounts yet, you do not have a credit score. This is because you don’t have a credit report yet. Your credit score is derived from the information contained in your credit report, which details your credit history.
Credit is an important part of most Americans’ finances, and like anything else, it has to begin somewhere. Naturally, this then begs the question: What credit score do you start with? And how do you begin building credit to earn a good credit score?
Basically, if you want to build a solid foundation for your financial future, it’s important to start building credit at an early age. In this article, we’re going to take a look at how you acquire a starting credit score, the types of credit to consider, and some good habits to help you build a strong credit history that will give you a good credit score.
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What credit score do you start with?
It’s a common misconception that your starting credit score is zero because you don’t have any credit accounts yet. Another common myth, if you know anything about credit scoring ranges, is that your credit score starts at 300, which is the lowest credit score possible.
In fact, neither of these is true. If you have yet to establish credit of any kind, your credit score simply doesn’t exist at this point. Basically, there is no such thing as a first credit score of zero, and a credit score of 300 is typically an indication of badly damaged credit.
If you’re young and have no credit accounts (which is typically the case for an individual with no available credit), you simply haven’t had the time to do any damage to your credit report. The better news is that it’s not that difficult to build credit when you’re starting from scratch, even if it won’t happen overnight.
When does your credit score start?
Your credit score starts as soon as you acquire a credit account or a loan and begin paying back your credit, explains Ian Wright, a financial expert and Director at Business Financing.
“If you haven’t ever had a credit card or made a big purchase such as a house, car, or something requiring a payment plan, then you don’t have a credit history — this normally means you don’t have a credit score yet. The beginning of the game is simply that you are without a score, and only when you begin to borrow and pay back your debts (or not) will your personal score start to be illustrated.”
It typically takes six months to generate a FICO credit score (one of the major scoring models), but sometimes your credit score will begin as soon as you are approved for credit and start using it.
Credit scores vs. credit reports
Any new credit consumer should be aware of the distinction between your credit report and your credit score, emphasizes Freddie Huynh, Vice President of Data Optimization with Freedom Debt Relief and former Lead Data Scientist at FICO for 18 years.
“Understand that credit reports and credit scores are different. A credit report lists your payments, debts, and credit limits over time. In contrast, a credit score is a number between 300 and 850. It is intended to measure creditworthiness based on credit history. To develop credit scores, credit reporting agencies use information from credit reports — meaning it is important to review credit reports for accuracy.
Pro Tip
Even if you don’t think you have an initial credit score yet, it’s a good idea to check for credit reports in your name anyway. You may actually have an established credit file already and not realized it, such as if you are an authorized user on someone else’s credit account or if you’re a victim of identity theft.
How is your credit score calculated?
A number of factors go into determining credit scores, including payment history, credit utilization, and the length of your credit. There are several different credit scoring models, but the two most common are FICO and VantageScore. (It should be noted that some lenders use a different scoring system, so your credit scores may appear differently when you apply for a loan.)
Both of the major credit scoring models use a scoring range of 300 to 850, with 300 indicating very poor credit and 850 being an excellent credit score. Multiple factors of your credit history go into compiling your credit score, with each type of score using different factors and weights:
| Scoring Models | |||
|---|---|---|---|
| FICO | VantageScore | ||
| Payment history | 35% | Payment history | 40% |
| Credit utilization | 30% | Age/Type of credit | 21% |
| Length of credit | 15% | Credit utilization | 20% |
| Credit mix | 10% | Total balances | 11% |
| New credit | 10% | New credit | 5% |
| Available credit | 3% |
The following are the factors used to determine your FICO score (note that VantageScore calculations are slightly different; see the above table for details):
Payment history (35%)
Your history of on-time payments is the most heavily weighted factor in determining your credit score. As long as you make timely payments, your score will improve. The flip side is also true: if you’re late or miss a payment even once, your credit history will suffer and your credit score will drop.
Amounts owed (30%)
Otherwise known as your credit utilization ratio, this factor refers to how much credit you’re using in relation to your credit limits. Typically, good credit utilization is when you’re using less than 30% of your available credit, which is favorable to your credit score.
Length of credit history (15%)
How long you’ve had your credit accounts (or installment loans, such as car loans or student loans) is another element used to determine your credit score. The longer you have credit (and manage it responsibly), the more your credit score will increase.
If you have a good credit history with a long track record, it signals to a lender or credit card issuer that you’ve learned how to manage loans and revolving credit limits over a longer period of time, making you less of a risk for new credit.
Credit mix (10%)
You can also improve your credit scores by having a good credit mix. This combination of debts may include revolving credit (like credit cards or department store cards) and installment debt (like auto loans or personal loans).
You can build up a good credit score with only a credit card, but if you have a limited credit history, an installment loan can help you improve your credit score faster — as long as you have the means to pay it back on time.
New credit accounts (10%)
New credit refers to how often you apply for additional credit accounts. Every time you apply for a new card or loan, it triggers a hard credit inquiry on your credit reports. These credit inquiries cause your score to drop temporarily, so it’s important to avoid applying for new credit too often.
Pro Tip
Keep in mind that because credit scoring models vary, you may see different credit scores across the three major credit bureaus. This is nothing to be concerned about because score ranges overlap, so if you have a good credit score with one, that most likely means your average credit score is good across all three credit bureaus.
Starting your credit score
According to Wright, “To build a good credit score quickly is beneficial in order to be appealing to future borrowers. By showing that you can pay back debts in a timely fashion over a prolonged period, it proves that you would be a reliable person to loan to, which could enable you to borrow larger amounts going forward.”
If you’re wondering how you can build a good credit score when you don’t have any credit to begin with, here are a few ways you can get started:
Become an authorized user on someone else’s credit card
A great way to gain a starting credit score is to become an authorized user on someone else’s credit card. Parents often do this for children going off to college, but you can ask any family member or friend to add you as a user. You don’t even need to have physical possession of the card to reap the benefits of their good credit and start building your own credit score.
Get a secured credit card
Unlike a regular credit card, a secured credit card requires a cash deposit, making it an ideal choice for those trying to build credit (or people trying to repair bad credit). Because a secured card uses a deposit for collateral, your approval odds are higher than they would be for an unsecured card.
Apply for a credit-builder loan
Credit-builder loans are specifically designed for those trying to build or repair their credit history. Unlike traditional loans, for which you receive cash upfront and pay it back over time, you need to pay a credit-builder loan off before you receive the money.
Loan amounts are typically small (under $1,000 on average), so monthly payments should be manageable. However, if you think you’ll have trouble keeping up with the payments, this method of building credit isn’t recommended.
Apply for no-credit or poor-credit cards
Some unsecured credit cards are specifically made for people with bad credit or no credit. Although they don’t require a deposit, keep in mind that if you are approved for one of these cards, you will likely get a much higher interest rate than the national average. For this reason, you may want to hold off on unsecured cards until you’ve established some positive credit history first.
Student credit cards often fall under this category, although college students tend to get better interest rates than average consumers with bad credit.
How to increase your credit score
If you’re just starting your credit journey, you have the advantage of not yet having developed any bad habits that could hurt your credit history and your financial future. This means you’re perfectly poised to begin building good credit (and good credit habits) right from the start, so long as you follow a few simple guidelines:
Maintain on-time payment history
As mentioned previously, making on-time payments is one of the most important parts of your credit score. Your payment history is reported to the three major credit bureaus — Equifax, TransUnion, and Experian — who use that information to determine your creditworthiness. As long as you consistently make on-time payments toward your debt — be it a car loan, a mortgage, a student loan, a credit card, or anything else — you’re on the right track to a good credit score.
Keep your credit utilization ratio low
Your credit utilization ratio is the amount of credit you’re using in relation to your credit limit. Experts say a good rule of thumb is to keep this number below 30%. Keep in mind that credit utilization is calculated for each individual revolving credit line as well as for your overall credit utilization.
For example, if you have a credit limit of $1,000 on your first credit account, you would only need to spend $300 to reach 30% credit utilization. If you spend $500, you’re already at a 50% utilization rate, which is more than most lenders or credit card issuers want to see when extending new credit.
It can be easy to overspend on credit cards, particularly if you’re new to the credit game and your credit limits are low (which is to be expected if you haven’t established good credit yet). However, bear in mind that you may be paying higher-than-average interest rates as you work toward building your credit history, which can wreak havoc on your finances if you go into too much debt. For the sake of your initial credit score, it’s wise to stay within the 30% range as much as possible.
Bottom line: use your credit responsibly and never max out your credit limit. This can make it much harder to get additional credit in the future or to qualify for loans. Instead, make a point of using your revolving credit to make small purchases and pay off the balance on time each month.
Use a credit monitoring service
In addition to identity theft and fraud, you could occasionally become a victim of credit reporting errors. For free (or a small fee), you can sign up for a credit monitoring service that will notify you about any unusual activity on your credit report. These services can make it much easier to keep an eye on your credit score, which will bring you peace of mind as you continue to build credit.
Pro Tip
As Huynh says, “Every consumer can get a free copy of their credit report every 12 months from each of the three agencies (go to www.annualcreditreport.com). After reviewing, if there are any errors, the best and fastest way to correct them is to follow the directions on each agency’s website.”
Key Takeaways
- If you don’t have any credit yet, you do not have a credit score — your first credit score will be generated once you’ve acquired a credit account (usually after six months of credit usage).
- Your credit score is calculated based on factors of your credit history reported to the three major credit bureaus.
- Applying for a secured credit card, taking out a credit-builder loan, and becoming an authorized user on someone else’s credit card are all ways you can start building a credit history and a credit score.
- Tips to improve your credit score include always making on-time payments, keeping your credit utilization ratio low, and never spending more than 30% of your available credit limit on any card.
- Continue to monitor your credit by regularly reviewing your free credit report from each of the three credit bureaus. You can also get your free credit score through credit monitoring services, credit card issuers, banks, or credit unions.
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