What Is Your Credit Score When You First Start Out?
Navigate your initial credit journey. Understand how credit scores are established and learn to build a solid financial future.
A credit score is a numerical representation of an individual’s creditworthiness, typically a three-digit number between 300 and 850. Lenders, such as banks and credit card companies, use these scores to evaluate the risk associated with lending money. A higher score generally indicates a lower risk, making it easier to qualify for loans, credit cards, and other financial products at more favorable interest rates.
Your Starting Point: No Credit Score
When an individual first begins their financial journey, they typically do not have a credit score. This absence occurs because credit scores are generated from a history of borrowing and repayment activities, which a new borrower lacks. This state is often referred to as having a “thin file” or being “credit invisible,” meaning there is insufficient data for credit bureaus to calculate a score.
Credit bureaus, such as Experian, TransUnion, and Equifax, compile credit reports based on information provided by lenders. Without established credit accounts, there is no historical data for these agencies to analyze. For a FICO Score, at least six months of credit activity reported to a bureau is generally needed before a score can be generated. VantageScore models may generate a score with as little as one month of history on one account.
The Foundations of Your First Credit Score
Once a credit history begins to form, credit scoring models like FICO and VantageScore use specific categories of information from your credit report to calculate a score. Payment history holds the most weight, accounting for approximately 35% of a FICO Score and 40-41% of a VantageScore, emphasizing the importance of paying bills on time. A single late payment can negatively impact a score.
The amounts owed, also known as credit utilization, is another significant factor, contributing around 30% to a FICO Score and 20% to a VantageScore. This considers how much credit is being used relative to the total available credit; keeping utilization low, ideally below 30%, is recommended. The length of credit history, reflecting how long accounts have been open, accounts for 15% of a FICO Score and is influential for VantageScore.
New credit inquiries, which occur when applying for new credit, make up about 10% of a FICO Score and 5% of a VantageScore, as multiple recent applications can signal higher risk. The credit mix, or the variety of credit accounts (e.g., credit cards, installment loans), accounts for approximately 10% of a FICO Score and is considered in VantageScore models, showing a borrower can manage different types of credit responsibly.
Strategies to Establish and Build Credit
Establishing credit requires opening accounts that report activity to the major credit bureaus. Secured credit cards are a common starting point, requiring a cash deposit that often serves as the credit limit, typically ranging from $200 to $2,500. This deposit acts as collateral, reducing risk for the issuer, and responsible use, including on-time payments, builds positive payment history.
Becoming an authorized user on another person’s credit card account can also help, as the primary cardholder’s positive payment history and credit limit may appear on the authorized user’s credit report. This strategy is effective if the account is managed responsibly by the primary user, with consistent on-time payments and low utilization. Confirm that the card issuer reports authorized user activity to the credit bureaus for it to be beneficial.
Credit-builder loans are another option, particularly for those with no existing credit. Unlike traditional loans where funds are received upfront, with a credit-builder loan, the loan amount is held in a locked savings account or Certificate of Deposit (CD) while the borrower makes regular payments, typically for 6 to 24 months. Once the loan is fully repaid, the funds are released to the borrower, and the on-time payments are reported to credit bureaus, establishing a payment history. Some services also allow for reporting of rent and utility payments to credit bureaus, which can contribute to building a credit history, although not all landlords or utility companies participate in such reporting.
Monitoring Your Credit Progress
As credit is established, monitoring progress becomes important. Individuals can check their credit scores through various free services offered by credit card companies, banks, or financial websites. These services often provide an updated score and sometimes a summary of factors influencing it. While these scores are helpful, they might differ slightly from those used by specific lenders, as different scoring models exist.
Regularly reviewing credit reports is crucial for accuracy and to track progress. Federal law allows consumers to obtain a free copy of their credit report every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion) via AnnualCreditReport.com. Consumers can access these reports weekly for free.
Upon initially obtaining a score, it may start in the lower or fair range, typically between 300 and 669. With consistent and responsible credit management, including on-time payments and low credit utilization, scores will gradually improve over time.