Believe it or not, borrowers do not get the same credit score start point. Your first credit score will depend entirely on your financial activity. When a person does not have a long credit history or an initial credit score they are considered “credit invisible.”
Financial institutions use your credit score to determine your eligibility for loans, credit lines, and housing. Your credit affects your financial opportunities and how much you pay out of pocket. But if you haven’t yet acquired credit accounts, what credit score do you start with? Learn how borrowers build credit scores and if it’s possible to obtain perfect credit.
What Is the Starting Credit Score?
If you don’t yet have a FICO credit score, the scoring model used by 90% of lenders1, you may wonder, “where does my credit score start?”
Approximately 45 million adults in the United States are credit invisible.2 Being credit invisible means there is insufficient data to generate a credit score. Having an unestablished credit score can make it difficult for consumers to take advantage of financial opportunities. Building a credit history will help you establish credit scores over time.
There are various ways you can establish a credit history. Still, the most common method is obtaining a credit line or loan. Once you get approval to borrow money, it takes about six months of activity to get your first credit score.
Credit scores are an invaluable tool to lenders despite being a new invention. Credit scores were invented as an impartial tool for financial institutions to evaluate borrowers. In this modern age, a three-digit number represents your creditworthiness. The good news is that you can manipulate your average credit score for better loan terms and opportunities.
What Are Credit Reports?
Credit reports are a descriptive summary of your credit history. Three major credit bureaus collect your financial information: TransUnion, Equifax, and Experian. Each credit bureau writes and keeps a report of your economic activity for lenders to view and analyze.
You and authorized users can request to look at your credit reports. Authorized users include landlords, lenders, insurance companies, etc. There are two types of credit checks: soft and hard.
- Soft Credit Check — A soft credit check, also known as a soft pull, does not affect your credit score. This type of inquiry is typically done as part of a background check and does not appear on your credit reports.
- Hard Credit Check — A hard credit check, also known as a hard pull, decreases your credit score by a few points. When you apply for new accounts such as personal loans or car loans, the lender will request to view your credit reports to make an approval decision. This type of inquiry will remain on your credit report for two years.
Each of the three credit reporting agencies provides one free credit report annually, which allows you to check your free credit score. To get your free credit report, you can visit the Annual Credit Report website or call 1-877-322-8228. You can choose how many reports to receive and which credit bureau report. For example, you can specifically request the Experian credit report. To keep an eye on your credit score throughout the year, you can request a credit report every four months.
What Information Do Lenders See on Your Credit Report?
Your credit report has a lot of information lenders find helpful in verifying identities and determining credit worthiness.
Identifying Information
Your report will display your full legal name, address, phone number, and Social Security Number. If you previously listed any employers on a credit application, they will be visible on your report.
Credit Accounts
Your credit report will display both open and closed accounts. After seven years, the credit bureau will remove the closed account from your report. Lenders can see when accounts opened and closed, debt amounts, credit limits, and history of payments. Missed or late payment information will also be available to lenders.
Credit Inquiries
Any inquiries you make for loans or credit lines will be visible. Lenders can see which financial institution you applied with and the date of credit checks.
Public Records
Unfortunately, financial institutions can see negative information on a credit report. Public records include bankruptcies, collection accounts, foreclosures, civil suits, and judgments. The lien information will be visible if you have any personal property with a lien.
What 5 Factors Affect Your Credit Score?
The information used to calculate a credit score varies depending on the credit scoring model a credit bureau uses. FICO and VantageScore are two of the most commonly used credit scoring models. Typically, these five factors will define your starting credit score:
| Credit Score Factors and Their Impact | Description |
| Payment History (35%) | The record of your payment behavior, including whether you pay bills on time, have any late or missed payments, or have accounts in collections. |
| Credit Utilization (30%) | This factor measures how much of your available credit you are using. It’s calculated by dividing your credit card balances by your credit limits. |
| Length of Credit History (15%) | The length of time you’ve had credit accounts, including the age of your oldest account, the average age of all your accounts, and your most recent account activity. |
| Credit Mix (10%) | This factor considers the different types of credit accounts you have, such as credit cards, loans, student loan options, personal loans, mortgages, car loan options, and retail accounts. |
| New Credit Inquiries (10%) | This factor examines how often you apply for new credit. |
Continue reading to learn more about these factors to better understand how credit scores work:
Payment History
Payment history is one of the most important categories for credit score calculation. Your payment history accounts for 35% of your total score. It’s vital to make continuous on-time payments if you want to build a good credit score.
Late payments will decrease your credit score and make it more challenging to qualify for loans. Most financial institutions enforce late fees. The average maximum late fee for credit cards is about $36. If you constantly forget to pay on time, you can end up paying hundreds of dollars!
Credit Utilization
The amount of credit card debt you have can negatively affect your credit score. Why? Credit utilization accounts for 30% of your FICO credit score. You should not use more than 30% of your credit limit to achieve an excellent credit score.
How do you know if you have borrowed more than the recommended amount? Calculating your credit utilization ratio is simple. Just add up your total credit limits and credit card debt. Divide your entire credit card balance by your total credit limit, then divide the answer by 100. The result is your credit utilization ratio as a percentage. Suppose you use more than the recommended amount. In that case, it’s time to prioritize paying down your credit card debt to maintain good credit.
Credit History Length
The length of your credit history counts for 15% of your credit score. Unfortunately, you cannot alter this financial category. But the longer you manage an active credit account, the better your credit history will look to lenders. Having a credit account for years without any late payments can help you get a positive credit history.
Credit Inquiries
The number of credit inquiries you make in a year counts for 10% of your score. Every time you apply for a credit line or loan, one of the three credit bureaus will mark the inquiry on your credit report. Submitting a loan application will decrease your credit by a few points. Still, you can seriously damage your score by making more than six inquiries annually. Avoid excessive credit inquiries to maintain a healthy score.
Credit Mix
Your credit mix makes up 10% of your credit. A combination of installment loans and revolving credit accounts on credit reports can boost your score. However, you can still obtain a good credit score without various financial accounts. Lenders simply want to see your ability to manage your accounts without issue.
What Is a Good Credit Score?
Credit scores range from 300 to 850 points. The higher your credit score is, the better terms you will receive from lenders. Credit score ranges are split into five categories:
- Poor — 300-579
- Fair — 580-669
- Good — 670-739
- Very Good — 740-799
- Excellent — 800-850
Most financial institutions require a minimum credit score of at least 700 points, which falls into the good category. If you have a poor credit score, your financial options will be limited, and getting approval will be more challenging. Although, there are lenders that provide bad credit loans. Bad credit loans have flexible minimum credit score requirements at the cost of higher interest rates.
Financial Tools To Build Credit Scores
If you want to start building a credit file, consider using one of these financial tools. Qualifying for financial accounts can be difficult if you have an unestablished or limited credit history. But specific financial tools are made to help consumers obtain a starting credit score.
Secured Credit Card
Plenty of credit card issuers offer secured credit cards to new borrowers who want to start building credit. Secured credit cards require a security deposit, which becomes your credit limit. If you use $300 to obtain a secured credit card, then you can spend up to $300. Using your credit responsibly can help you get an excellent credit score. The good news is that you can typically expect to get your deposit back from a secured credit card.
Small Personal Loan
Personal loan amounts range greatly depending on your financial needs. Eligible borrowers can typically borrow as little as $200 and as much as $100,000. If you’re starting and trying to establish credit, taking out a small loan you can pay off quickly can help you build credit. The minimum credit score required varies by lender, but many offer flexible requirements.
Retail Credit Card
A retail credit card is typically easier to obtain than a traditional one. Retail cards do not require a security deposit, and many offer discounts for borrowers. If you want to build credit, consider applying for a retail card at your favorite store. You may be able to achieve a good credit history and work on building credit if you maintain a low balance and make on-time payments. But be mindful of your credit limit, available credit, and overspending!
Credit Builder Loan
A credit builder loan is a type of loan that allows borrowers with limited credit history to get access to funding. Instead of getting the money upfront, the borrower makes payment to the lender (which gets reported to at least one credit bureau) which are allocated into a savings account. Once those payments are completed, the borrower then gets back those funds plus interest. In the meantime they build positive credit as long as they make their payments on time.
Become an Authorized User
If you do not want to obtain your first credit account just yet, you can become an authorized user instead. Anyone with a credit card can add an authorized user to their account. Authorized users get their own credit card to make transactions but are not financially responsible for billing. Authorized users can slowly start to build credit without applying for a credit card themselves. But keep in mind that both credit scores can suffer if the account is not managed responsibly.
FAQs About How Credit Scores Start
Here are some potential FAQs that a person might have about credit scores:
Credit scores typically update every 30 days. This can vary depending on when your creditors report your information to the credit bureaus. It’s a good idea to check your credit report regularly to ensure the information is accurate and up-to-date.
No, checking your own credit score is considered a soft inquiry and does not affect your credit score. You can check your own credit score as often as you like without it impacting your credit.
If you find an error on your credit report, you should contact the credit bureau that produced the report and the company that provided the information. Both are responsible for correcting inaccurate or incomplete information in your report, but you must start the process.
Yes, it’s possible to get a loan or credit card with a low credit score, but it may be more difficult and you may face higher interest rates. Some lenders specialize in working with people who have low credit scores.
Paying your bills on time, reducing your debt, and keeping your credit card balances low can help improve your credit score. However, it’s important to remember that improving a credit score takes time and there’s no quick fix.
Yes, closing a credit card account can affect your credit score. It can decrease your available credit and increase your credit utilization ratio, which can lower your score. It’s generally a good idea to keep your oldest credit card open to maintain a longer credit history.
Thoughts From CreditNinja
At CreditNinja, we believe that everyone should be financially literate and informed. Whether you want to learn more about credit scores, banking, loans, or investing, we may have resources that can help you understand the basics! Check out CreditNinja’s blog page for hundreds of articles about all kinds of financial topics.
References:
1. Which Credit Score Do Mortgage Lenders Use? | TIME Stamped
2. More than 45 Million Americans are Either Credit Unserved or Underserved | TransUnion
3. 8 ways to fix a ‘bad’ credit score | CNET Money
4. Here’s what information appears on your credit report | CNBC
