What Credit Score Do People Start With?
Demystify how credit scores begin. Understand their formation from scratch and gain actionable strategies to build your credit profile effectively.
A credit score is a three-digit number representing an individual’s creditworthiness. It helps lenders assess the risk of extending credit, such as loans or credit cards. The article will clarify the common misunderstanding about a “starting credit score” and explain how individuals establish and build their credit history.
Understanding the Initial Credit Landscape
Individuals do not begin their financial journey with a pre-assigned credit score. There is no specific numerical score, like 300 or 500, that everyone starts with. Most people begin with no credit history, a status sometimes referred to as being “credit invisible.”
A credit score is only generated once a person has engaged in sufficient credit activity reported to credit bureaus. It takes at least six months of credit account activity for a score to be calculated. The true starting point for most individuals is having no score until they begin to use credit products responsibly.
How Credit Scores are Developed
Credit scores come into existence through a process involving credit bureaus and lenders. The three major U.S. credit bureaus—Experian, Equifax, and TransUnion—collect and organize consumer financial data. These bureaus do not make lending decisions or directly determine credit scores; they compile the information that scoring models use.
Lenders, including banks, credit card companies, and loan servicers, regularly report account activity to these credit bureaus. This data includes account balances, payment amounts, and whether payments were made on time. Once enough data is collected and recorded in an individual’s credit report, credit scoring models like FICO and VantageScore use this information to generate a numerical score. Different scoring models exist and can produce slightly different scores, but all rely on data compiled by the credit bureaus.
Key Elements for Building Credit
Credit scoring models, like FICO and VantageScore, analyze several categories of information from credit reports to determine a score. Payment history is the most significant factor, accounting for about 35% to 41% of a score. It reflects whether an individual consistently pays bills on time, as late or missed payments have a substantial negative impact.
Amounts owed, also known as credit utilization, is another important element, making up around 20% to 30% of a score. This factor considers the percentage of available credit currently being used; maintaining low balances, ideally below 30% of the credit limit, is advised. The length of credit history, which includes the age of the oldest account and the average age of all accounts, contributes approximately 15% to 21%. A longer history of responsible credit use is viewed favorably.
Credit mix, accounting for about 10% of a score, assesses the diversity of an individual’s credit accounts, such as revolving credit (like credit cards) and installment loans (like auto loans). A varied mix can be beneficial. New credit, also around 10%, considers recently opened accounts and credit inquiries. Opening multiple new accounts in a short period can temporarily lower a score.
Strategies for Establishing Credit History
For individuals starting with no credit history, several strategies can help establish a positive credit profile. Secured credit cards are a common starting point, requiring a refundable security deposit, typically between $200 and $500, which serves as the credit limit. Responsible use, including on-time payments and low balances, is reported to credit bureaus, building a positive payment history.
Credit builder loans are another option, structured differently from traditional loans. The loan amount, often between $300 and $1,000, is held in a locked savings account or Certificate of Deposit (CD) by the lender. The borrower makes regular payments over a set term, usually six to 24 months; these on-time payments are reported to credit bureaus, creating a payment history. Once the loan is fully repaid, funds are released to the borrower.
Becoming an authorized user on a trusted individual’s credit card account can help establish credit. The authorized user receives a card, and the account’s payment history and credit limit may appear on their credit report, benefiting from the primary cardholder’s responsible management. Confirm that the card issuer reports authorized user activity to the credit bureaus.
Small installment loans, such as personal loans or student loans, can contribute to credit history if managed well. Consistent, on-time payments on these loans demonstrate reliability and add to payment history and credit mix. Newer scoring models or lenders may consider alternative data, such as on-time rent, utility, or subscription service payments, to assess creditworthiness, particularly for those with limited traditional credit. Individuals may need to opt-in for these payments to be reported to credit bureaus.