What Credit Score Do You Start With?

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By Lauren Bringle, AFC®

Building good credit is important because many major life decisions depend upon your credit standing.

Good credit is helpful for everything from getting credit cards without outrageously high interest rates to taking out a mortgage, buying a car, and even landing a dream job.[1]

Most credit scores start at or around 300 and go up to 850. While 300 is the lowest credit score, it doesn't necessarily mean you will start with that number. Until you have active credit accounts for upwards of 6 months, you will likely be categorized as credit invisible or unscored.

Credit invisible means someone who hasn't had a credit report generated by the credit bureaus yet. Unscored consumers are ones who don't have enough active credit history to produce a credit score.

Once credit bureaus have sufficient information, they will use multiple factors to generate your credit score.

It isn’t always easy to build a strong credit score, but over time you’ll see progress once you commit to the lifestyle changes and steps you need to succeed.

What is a credit score?

People who struggle to obtain loans and credit cards often wonder what a credit score is and why it matters. In a nutshell, credit scores are three-digit numbers used by lenders to determine the creditworthiness of an individual based on several credit data factors.[2]

There are two main types of credit scoring models: FICO® credit scores — used by over 90% of lenders — and VantageScore. These two agencies use different models, and sometimes base their scores on different information from your creditors, which leads to you having multiple credit scores.

Sometimes these different credit scores can vary quite a bit[1], depending on a number of factors, including when your credit reports were obtained, whether there are errors on your credit reports, which credit bureau the score is pulled from, and which credit scoring model is used.

For example, the VantageScore 3.0 scoring model differs from VantageScore 4.0 in how it weighs credit utilization rate, collection accounts, and tax liens, so if one credit bureau uses the 3.0 model and another uses the 4.0 model, your scores will differ. Additionally, lenders may fail to report to all three credit bureaus, causing discrepancies.

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What credit score do you start with?

Typically, most credit scores have a low end at or around 300 and go up to 850. People without a credit history will likely be unscored for some time while the credit bureaus gather data to generate the initial credit score.

Lenders perceive credit scores according to a few general categories. The following list conforms to FICO’s scoring practices.[2]

  • 580 and below is a poor credit score.
  • 580-669 is a fair credit score.
  • 670-739 is a good credit score.
  • 740-799 is a very good credit score.
  • 800 and above is an exceptional credit score.

These credit score ranges will determine where you stand with lenders and what they perceive your creditworthiness to be. For example, if you have a low credit score, lenders will consider you to be a “subprime borrower.” People who fall into this category are often denied credit or given very high interest rates, which may make borrowing cost-prohibitive.

What if you don’t have a score?

If you don’t use credit or loans, then you probably won’t have a score at all. This means the credit bureaus can’t calculate a score for you because you don’t have enough scorable information, therefore making you unscorable.

You may also be considered invisible to the credit bureaus if you don’t have any credit or loan products in your name or if you only use cash. If this is the case, it’s a good idea to learn how to build credit. In times of need, you may find yourself strapped for money, and having good credit can help get you through those difficult times.

Good credit can help facilitate major purchases, such as a home, car, or other assets which might not be feasible to buy with a lump sum of cash, but poor credit can work against you. For instance, lenders are notorious for giving high interest rates for auto loans to people with no credit or bad credit.

Building your credit score

Before you start building your credit, it’s important to understand the elements the credit scoring agencies use to calculate people’s scores.

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5 components of a credit score

A credit score isn’t a random number assigned to a person. It’s actually a complex formula that takes into account several factors, including your payment history, amounts owed on debts, credit history, new credit and your credit mix. Combined, these five components help determine the credit score you’re assigned.

1. Payment history

Your payment history plays a significant role in how your credit score is calculated. This component makes up 35% of your FICO score, making payment history a major factor in the calculation.[3]

Payment history takes a look at how you handle debt, which includes information on the repayment of your credit cards, mortgages, loans and other debts.

Evaluating your payment history involves multiple factors. This includes how many items you have past due (frequent late payments can sink your score quickly!), how much time has passed since you were last delinquent on an account, and any amounts owed on collection accounts or delinquent accounts.[3]

2. Amounts owed

The amount of money you owe makes up 30% of your FICO score.[4]

FICO also considers the amount you owe on specific accounts, like credit cards and loans. Finally, the scoring agency looks at how much you still owe on any debts and what your credit utilization is on revolving accounts.[4]

Revolving credit is how much credit you have and how much you’re using it (not using it or owing too much can have a negative impact on your score — a low credit utilization ratio is optimal).

3. Credit history

A person’s credit history is another major component that is factored into the different credit scoring models. Credit history accounts for 15% of the credit score.[5] FICO evaluates how long your credit accounts have been active and the age of your oldest and newest accounts.[6]

Then, it considers how long since you’ve used your accounts. It can be tempting to shut down accounts you have paid off, but doing so could have a negative effect on your credit history. The length of your credit history matters. Always look at your entire credit history and lines of credit before closing your oldest accounts.

4. New credit

New credit, while factored in less than other components, is noteworthy because new credit accounts for 10% of your credit score. Opening too many new credit accounts in a short time is not good for your credit score.[6]

FICO scores consider credit inquiries in its formula for 12 months. If you have several new credit accounts in a short period of time, this can bring your score down.

This is especially true if you have limited credit or if you don’t have a long or strong credit history. Many credit card companies offer appealing offers, but if you're building credit, be sure not to apply for too many new credit cards within a short timeframe.

5. Credit mix

The combination of different types of credit you have is known as your credit mix. This component comprises every type of credit you currently use — the combination of credit cards, personal loans, installment loans (such as student loans, car loans or mortgages), or any retail accounts you possess.[6] Your credit mix accounts for 10% of your credit score.

Your debt to credit ratio, also referred to as the “credit utilization rate,” is an equation that takes into account the total amount of revolving credit you’re using and divides it by your total amount of available credit (aka “credit limit”).[7] Your debt to credit ratio is another factor lenders may consider when evaluating you for credit or a loan.

Once you begin building your credit, it’s a good idea to check your credit score frequently to ensure you’re on the right track. This way, if your score isn’t rising, you can look at the above five components to see where or why your score may be going awry and take steps to improve it.

Tips for improving your credit score

If you find your score isn’t rising — or worse, it’s sinking lower — the good news is that most issues are correctable. To succeed in boosting your credit score, you’ll need to commit to this goal and take deliberate steps.[8]

  • Check your credit report regularly.
  • Set up automatic payments to pay bills on time.
  • Use your credit cards wisely.
  • Create a plan to reduce your debt.

In addition, it is very important to routinely manage and monitor your credit accounts.[8] This includes learning how to check your credit score.

Regularly monitoring and checking your credit score will assure you your hard work is paying off as you see your score increasing over time. Many credit cards and other financial agencies offer free credit score access to their customers.

However, if it’s not increasing (or if it’s actively decreasing), this will show you that you need to make further changes. You can take advantage of free credit report checks and perform routine credit monitoring. A credit report (as opposed to a credit score) is like a report card of your finances. It keeps track of all your debt-related accounts to determine whether you’re a trustworthy borrower to a credit card company. The information on your credit reports is taken into account when determining your credit scores.

Everyone is entitled to one free credit report per year from each of the three major credit bureaus: Equifax, TransUnion and Experian. Requesting and then reviewing your free annual credit reports can help give you insight into your credit health, allow you to correct any errors on the reports (one in five people have mistakes on their credit reports),[9] and also alert you if you become a victim of identity theft (if you start to see strange entries).

The bottom line

If you are credit invisible or have a low credit score, you might ask yourself when would be the best time to build credit. The answer to this question is always: NOW. Don’t delay.

Establishing creditworthiness can take time, so the sooner you understand how credit scores are calculated and begin to build your credit score, the better off you’ll be in the long run. Knowing how the process works will help you eliminate any credit blemishes and maintain a healthy credit score.

A healthy credit score helps people qualify for the best credit cards, and these cardholders enjoy other perks, as well. In addition, good credit can have a positive effect on everything from buying a new car or house to landing a great job. In the long run, your pocketbook will thank you for all the hard work you put into improving your credit file and maintaining an excellent credit score.

Sources

  1. CNBC. “Why building credit is so important, from mortgage applications to future jobs,” https://cnbc.com/select/why-building-credit-is-so-important/. Accessed July 7, 2021.
  2. MyFICO. “What is a Credit Score?” https://www.myfico.com/credit-education/credit-scores. Accessed July 7, 2021.
  3. MyFICO. “What is Payment History?” https://www.myfico.com/credit-education/credit-scores/payment-history. Accessed July 6, 2021
  4. MyFICO. “What is Amounts Owed?” https://www.myfico.com/credit-education/credit-scores/amount-of-debt. Accessed July 7, 2021.
  5. Experian. “How Does Length of Credit History Affect Your Credit?” https://www.experian.com/blogs/ask-experian/length-of-credit-history-affect-credit-scores/. Accessed July 7, 2021.
  6. MyFICO. “What’s in My Credit Scores?” https://www.myfico.com/credit-education/whats-in-your-credit-score. Accessed July 6, 2021.
  7. Equifax. “What is a Debt to Credit Ratio?” https://www.equifax.com/personal/education/credit/score/debt-to-credit-ratio/. Accessed July 7, 2021.
  8. MyFICO. “How to repair your credit and improve your FICO Scores,” https://www.myfico.com/credit-education/improve-your-credit-score. Accessed July 7, 2021.
  9. CFPB. “Common errors people find on their credit report - and how to get them fixed,” https://www.consumerfinance.gov/about-us/blog/common-errors-credit-report-and-how-get-them-fixed/. Accessed July 10, 2021.

About the Author

Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

Editorial Policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).

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Written on August 13, 2021
Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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