What Do You Start Off With for a Credit Score?

A credit score is a numerical summary of an individual’s creditworthiness, primarily based on the data contained in their credit reports. These three-digit numbers, commonly FICO or VantageScore, help lenders assess the likelihood of a borrower repaying debt on time. A favorable credit score is important for various financial activities, influencing access to loans, mortgages, rental agreements, insurance rates, and the terms and interest rates offered for credit products.

People do not automatically receive a credit score upon reaching adulthood or financial independence. This is because a score is not automatically assigned but rather built through documented financial activity.

Understanding Your Starting Point

Individuals typically do not have a credit score at the outset of their financial independence because credit scores are generated from a “credit file.” This file is a collection of credit data maintained by credit bureaus, such as Experian, Equifax, and TransUnion. Without sufficient data within this file, a credit score cannot be calculated by scoring models.

A person with very little credit history is said to have a “thin file,” while someone with no credit history at all has a “no file” status. These terms indicate that there isn’t enough information for credit reporting agencies to produce a score.

Initial Methods for Establishing Credit

For those starting without a credit history, several methods exist to begin establishing a credit file that can lead to a score. These approaches help demonstrate responsible financial behavior to credit bureaus.

Secured Credit Cards

Secured credit cards are a common starting point, requiring a cash deposit that often serves as the credit limit. This deposit acts as collateral, reducing the risk for the issuer. Responsible use, including making timely payments and maintaining low credit utilization, is reported to the major credit bureaus and helps build a positive payment history. It is important to confirm that the card issuer reports activity to all three major bureaus for maximum benefit.

Credit Builder Loans

Credit builder loans offer another structured way to establish credit. Unlike traditional loans where funds are received upfront, with a credit builder loan, the money is typically held in a savings account or certificate of deposit (CD) until the loan is fully repaid. Regular, on-time payments are reported to credit bureaus, creating a positive payment history, which is a significant factor in credit scoring.

Authorized User

Becoming an authorized user on another person’s credit card account can also contribute to building credit. When added, the authorized user receives a card linked to the primary account, and the account’s payment history and credit limit may appear on their credit report. This can benefit the authorized user if the primary cardholder manages the account responsibly, making on-time payments and keeping balances low. Before becoming an authorized user, ensure the card issuer reports authorized user activity to the credit bureaus.

Small Personal Loans

Small personal loans from financial institutions, particularly credit unions, that report to credit bureaus can also help establish credit. These are installment loans, and timely repayment of the principal and interest contributes to a positive credit history.

Student Loans

Student loans, both federal and private, contribute to an individual’s credit history once they enter repayment. As a type of installment loan, consistent on-time payments help build a positive payment history. These loans also contribute to the length of credit history and credit mix, which are factors in credit scoring models. However, missed or late payments on student loans can negatively impact a credit score.

Rent and Utility Payments

Some services allow on-time rent and utility payments to be reported to credit bureaus, which can also aid in building a credit file. While not all bureaus or scoring models may incorporate this data, it can provide an additional avenue for demonstrating financial responsibility.

What to Expect When You Get Your First Score

Once sufficient credit activity has been reported to the credit bureaus, typically after three to six months of consistent account activity, a credit score will be generated. The initial credit score often falls within the fair to good range, such as 580 to 700. It is uncommon for a first score to be in the excellent range immediately, but it should not be poor if initial accounts are managed responsibly.

The primary factors influencing this initial score include the payment history on the first account(s) and credit utilization. Payment history, which reflects whether payments are made on time, is the most influential factor, accounting for approximately 35% of a FICO score. Credit utilization, the amount of credit used compared to the total available credit, is another significant factor, ideally kept below 30%.

Individuals can check their credit score once it is established through various means. Many credit card companies and banks offer free credit monitoring services, and consumers are entitled to a free credit report from each of the three major bureaus annually.