Do Credit Scores Start at 0? How Your Score Is Calculated

Credit scores do not start at zero; instead, individuals typically have no credit score until they establish a credit history. A credit score serves as a numerical summary of one’s creditworthiness, indicating the likelihood of repaying borrowed money.

Understanding Credit Scores

A credit score is a three-digit number that evaluates an individual’s financial reliability. Its purpose is to help lenders assess the risk associated with extending loans, mortgages, or credit cards. The most widely used scoring models, FICO and VantageScore, range from 300 to 850. A higher score indicates a lower risk to lenders, potentially leading to more favorable terms. Credit data is collected by the three major credit bureaus in the U.S.: Experian, Equifax, and TransUnion, which then feed into these scoring models.

How Your Credit Journey Begins

Individuals starting out often have no credit score, a situation referred to as having a “thin file” or being “credit invisible.” This means there is insufficient information to generate a score.

Building a credit history can begin through various avenues. Obtaining a secured credit card, which requires a cash deposit as collateral, is a common starting point due to lenient approval requirements. Student loans or auto loans also contribute to establishing a credit history once payments are reported to credit bureaus. Becoming an authorized user on someone else’s established credit card is another method, as the account’s payment history can appear on the authorized user’s credit report.

Once enough credit activity is reported, after three to six months, a credit score can be generated. This initial score is not 0, but the first calculated score based on nascent credit activity, which might be lower due to limited history.

Key Factors Shaping Your Score

Credit scoring models consider several categories of information to calculate a score, each with varying influence:

• Payment history is the most impactful factor, accounting for approximately 35% of a FICO Score. This emphasizes the importance of on-time payments.
• The amounts owed, particularly the credit utilization ratio (how much credit is being used compared to the total available), makes up about 30% of a FICO Score. Keeping this ratio below 30% of available credit helps maintain a good score.
• The length of one’s credit history, including the age of the oldest account and the average age of all accounts, contributes 15% to a FICO Score. A longer history with responsible management indicates lower risk to lenders.
• New credit, which includes recent applications and newly opened accounts, accounts for about 10% of the score. Numerous new credit inquiries in a short period can temporarily lower a score.
• Credit mix represents approximately 10% of a FICO Score and considers the diversity of credit types, such as installment loans and revolving credit.

Steps to Establish and Improve Credit

Establishing and maintaining a strong credit score involves consistent financial practices:

• Making all payments on time is the single most effective action, as payment history carries the most weight in credit scoring. Setting up automatic payments can help ensure bills are never missed.
• Keep credit utilization low; balances on revolving accounts like credit cards should remain well below their credit limits.
• Avoid opening too many new credit accounts simultaneously to prevent unnecessary impacts on the “new credit” factor.
• Regularly check credit reports from Experian, Equifax, and TransUnion for errors, as inaccuracies can negatively affect scores.

Over time, demonstrating responsible credit behavior across these factors will lead to a higher and more favorable credit score.