What Credit Score Do We Start With?

A credit score is a numerical representation of an individual’s creditworthiness, summarizing their financial behavior related to borrowing and repayment. It serves as a tool for lenders, landlords, and other entities to assess the risk associated with extending credit or services. A higher score generally indicates a lower risk, potentially leading to more favorable terms for loans and other financial products.

Understanding No Credit

Having “no credit” means there is insufficient information in a person’s financial history for a credit score to be calculated. This differs from “bad credit,” which indicates a history of financial mismanagement or missed payments. Individuals often have no credit because they have never obtained loans or credit accounts that report to the major credit bureaus, such as Experian, Equifax, and TransUnion.

Without a credit history, financial institutions lack data to evaluate a person’s reliability as a borrower. This can lead to difficulties in securing loans, credit cards, or even renting an apartment, as many landlords check credit as part of their tenant screening process. Some utility companies and mobile phone providers may also require higher security deposits if an applicant has no credit score.

Building Your First Credit Score

Establishing a credit history involves engaging with financial products that report activity to credit bureaus. Secured credit cards are a common starting point; these cards require a cash deposit, which often becomes the credit limit. This deposit minimizes risk for the issuer, making approval easier for those with no credit. Responsible use, including on-time payments, is reported to credit bureaus, helping to build a positive history.

Credit-builder loans offer another structured way to establish credit. Unlike traditional loans, the borrowed amount is typically held in a locked account, such as a certificate of deposit, while the borrower makes regular payments over a period. Once the loan is fully repaid, the funds are released to the borrower. The lender reports these consistent payments to credit bureaus, creating a payment history.

Becoming an authorized user on another person’s credit card account can also contribute to building credit. The authorized user receives a card and can make purchases, but the primary cardholder remains responsible for payments. The account’s payment history and credit limit may appear on the authorized user’s credit report, potentially helping to establish a credit file, provided the primary account holder manages the account responsibly. Student loans and other installment loans also contribute to credit history as payments are reported to credit bureaus.

How Initial Scores Are Calculated

Credit scoring models, such as FICO and VantageScore, analyze the information collected by credit bureaus to generate a score. Lenders and creditors regularly report account activity, including payment history and balances, to these bureaus. This reported data forms the basis of a credit report, from which a score is then calculated. It can take a new account approximately 30 to 60 days to appear on a credit report, and a score can be generated once sufficient activity is reported.

FICO scores, widely used, consider five main categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). For new credit files, a shorter credit history means the length of credit history factor is naturally shorter. Consistent, on-time payments on accounts like secured credit cards or credit-builder loans are important, as payment history carries the most weight. The amount owed, or credit utilization, also plays a significant role; keeping balances low relative to credit limits is beneficial. While new credit inquiries can temporarily impact a score, establishing a mix of credit types, like revolving credit and installment loans, influences the credit mix category over time.