What Does a Credit Score Start At?
Your credit score doesn't start at a number. Learn how it's created and the key elements that shape its early development.
A credit score is a numerical summary of an individual’s creditworthiness, providing lenders with an assessment of risk. This three-digit number helps financial institutions decide whether to approve loans, mortgages, or credit cards, and at what interest rates. The score’s influence extends beyond borrowing, sometimes impacting approvals for housing or insurance.
The Initial Credit Score
A credit score does not begin at a predetermined number, such as 300 or 500. Instead, a score is generated once sufficient credit activity is reported to the major credit bureaus: Experian, Equifax, and TransUnion. The most widely used credit scoring models, FICO and VantageScore, typically range from 300 to 850. A score only appears in a credit file when enough data exists for a calculation to be performed.
Establishing Your Credit File
To generate a credit score, information must be reported to the credit bureaus, forming a credit file. One effective way to start is by opening a secured credit card, which requires a cash deposit that often serves as the credit limit. Payments made on a secured card are reported to the credit bureaus, helping to build a positive payment history. Another option is becoming an authorized user on an existing credit card account, where the primary account holder’s responsible payment behavior can positively influence the authorized user’s credit report.
Credit-builder loans also provide a structured way to establish credit. With these loans, funds are often held by the lender while the borrower makes regular payments, which are reported to the credit bureaus. Student loans and other installment loans can contribute to a credit file, provided their payment activity is reported. Some services allow for the reporting of utility or rent payments to credit bureaus, which can further aid in file establishment. These activities should be consistently reported to the three major credit bureaus.
Factors Influencing Early Credit Scores
Once a credit file is established and an initial score is generated, several factors influence its value. Payment history holds the greatest weight, typically accounting for 35% of a FICO score and up to 40% for some VantageScore models. Making on-time payments demonstrates financial responsibility and is important for a favorable score, whereas late or missed payments can cause significant harm.
Credit utilization, the amount of credit used relative to the credit limit, generally accounts for 30% of a FICO score and 20% of a VantageScore. Keeping this ratio low, ideally below 30%, is beneficial for the score. The length of credit history, reflecting how long accounts have been open and active, also plays a role, making up about 15% of a FICO score. While new accounts naturally have a short history, consistent positive activity over even a few months helps.
The types of credit used, such as a mix of revolving accounts like credit cards and installment loans like student loans, contribute to about 10% of a FICO score. This diversity can demonstrate an ability to manage different credit obligations. New credit applications, indicated by hard inquiries, can temporarily lower a score and account for about 10% of a FICO score. Opening multiple new accounts too quickly, especially when credit history is limited, can signal increased risk to lenders.