A credit score is a three-digit number that gives lenders and creditors an idea of your credit risk. It’s used in many aspects of life, from apartment rentals to financing big-ticket items. Your starting credit score depends on several factors, including your credit habits and the scoring system used. With that in mind, here’s how your score is determined, why credit matters and how to improve it.
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Where Does Your Credit Score Start?
There’s no standard starting credit score since the score you start with is based on the way you use credit.
The lowest credit score used by the main credit scoring models, FICO and VantageScore, is 300. However, you won’t start with a score that low unless you’re frequently late on payments or have a habit of overspending.
Typically, people don’t get a score until a lender or another entity requests their credit report to assess their creditworthiness. This usually happens when someone takes out student loans or applies for their first credit card.
Your Starting Credit Score Won’t Really Matter
After applying for your first loan or credit card, you’ll begin building a credit file that will give you your first credit score. From then on, your score will change based on your ability to make on-time payments, keep credit utilization low and so on.
What’s more important than your starting score is whether you can use credit responsibly. If you can, then you can build the best credit score possible. For most people, it takes around 7 years to achieve excellent credit or an 800+ FICO score.
What Does It Mean to Have No Credit?
Having no credit doesn’t mean you have bad credit or a bad credit score. It simply means you’ve never applied for a loan, credit card or any other form of financing. Thus, you don’t have credit history with any of the three major credit reporting agencies — Equifax, Experian or TransUnion.
People with no credit are sometimes considered “credit invisible” because of their limited credit history and lack of score. Some people believe they can build credit by making payments to utility companies or rental agencies. However, these payments are rarely reported to the bureaus, so they don’t affect your score.
According to a report from the Consumer Financial Protection Bureau (CFPB), around 26 million Americans are “credit invisible.” Another 19 million people have a credit report but don’t technically qualify for a credit score. This is because you need at least one account on your profile to start building credit.
For FICO, you must have an account that’s 6+ months old to establish a credit history. VantageScore simply requires you to have an account. Unfortunately, without a credit history, you won’t meet the minimum requirements to have a VantageScore or FICO credit score.
To learn more about starting credit scores, check out this video:
What Does It Mean to Have Bad Credit?
Bad credit means a history of late payments, accounts in collections, charge-offs, bankruptcies, foreclosures, repossessions and other negative marks on your credit report. It can make qualifying for financing difficult and usually means paying higher premiums and interest rates.
Minimum Credit Score Requirements
To get a starting credit score, you’ll need to first establish some form of credit. One of the easiest ways to do this is to become an authorized user on a family member’s credit card account. And, as long as the account owner makes on-time payments and keeps their balances low, your score will start to grow. The great thing about this option is that you can do this as a teen.
Another option is to establish a savings account at a bank or credit union. You will, however, have to wait until you’re 18 to get your own account. If you keep the account in good standing, the financial institution might offer a credit card with a low starting limit.
Credit Score Ranges Differ Between the Primary Scoring Models
People have multiple credit scores, but the main scoring models are FICO and VantageScore. FICO was established in 1989 and is currently used by 90% of lenders in the United States. The credit reporting agencies created VantageScore in 2006 to compete with FICO and ensure accurate scores. Since there are different scoring models, your credit score will differ depending on the model used.
FICO Credit Scoring Model
The FICO score ranges are:
- Excellent credit score: 800+
- Very good credit score: 740 – 799
- Good credit score: 670 – 739
- Fair credit score: 580 – 669
- Poor credit score: 300 – 579
Your FICO score is calculated based on the following factors:
- Payment history: 35%
- Credit utilization ratio (how much you owe vs. available credit): 30%
- Average length of your credit history (across all open accounts): 15%
- New credit: 10%
- Credit mix: 10%
To get a FICO score, you’ll need to have an account that’s at least six months old. This account must also have been reported to the credit bureaus in the past six months.
If you’re applying for any type of financing, aim for a 670+ FICO score. That way, you’ll get the best rates and have a better chance of qualifying.
You can still receive financing with a lower score – for example, conventional mortgage lenders require a 620+ score. However, the terms and interest rates might not be as ideal and you’ll face more rejection from lenders.
VantageScore Credit Scoring Model
The original VantageScore credit scoring model ranged from 501 to 990. The current models, VantageScore 3.0 and 4.0, now follow a scoring model more similar to FICO:
- Excellent credit score: 781 – 850
- Good credit score: 661 – 780
- Fair credit score: 601 – 660
- Poor credit score: 500 – 600
- Very poor credit score: 300 – 499
The same factors that affect your FICO score also impact your VantageScore. However, VantageScore ranks each factor based on how influential it is to your overall credit. For example:
- Credit utilization: Most influential
- Credit mix: Highly influential
- Payment history: Moderately influential
- Length of your credit history: Less influential
- New credit: Less influential
To get a VantageScore, you must have at least one account of any age reported.
How to Get Free Credit Scores
You can get your FICO or VantageScore for free from various financial institutions and major credit card issuers. This includes Discover, Capital One (CreditWise), Citibank and Ally Bank. You can also access your credit score through Credit Karma. Also, you can monitor your score through MyFICO.com for a small fee or request it from the credit bureaus.
Why Does a Credit Score Matter?
Most prospective lenders, insurance providers, landlords, and service providers use a person’s credit score to determine their risk level. It shows them how reliable a person is and how likely they are to make payments on time.
Your credit score is also used to determine loan and credit card interest rates, insurance premium rates, and rental deposit amounts. Though, if you haven’t established credit, lenders are more likely to decline your applications because they consider you a gamble.
Check Your Credit Report
The three major credit bureaus are TransUnion, Equifax and Experian. They gather information related to your credit and financial history and use it to compile a credit report. Prospective lenders and other entities can then use that information to determine your creditworthiness.
It’s a good idea to check your credit report regularly. For the average consumer, this means once a year. But if you’re applying for a large form of financing — like an auto loan or mortgage — check it more frequently.
You should also get your report from all three agencies. This is because lenders and creditors aren’t required to report to all of them. Additionally, the agencies don’t share consumer information with one another. Because of this, your credit score and report information could be different.
Around 20% of credit reports contain at least one error in personal or credit information. Some of these errors can hurt your credit score, so review your report for anything that doesn’t look right. If you find an error, dispute it with the corresponding credit reporting agency or the entity that reported it.
Also check your credit report for information regarding payment activity, credit utilization, hard inquiries and any other recent activity. These factors can help or hurt your overall score. For example, any time a lender checks your credit report, it results in a hard inquiry. Each hard inquiry can cause your score to temporarily drop by up to 5 points.
Request a free credit report once a year from annualcreditreport.com or online through the three major credit bureaus.
Why is Bad Credit Worse Than No Credit?
Lenders are more likely to work with someone with no credit than they are someone who has bad credit. This is because the person with bad credit is a known risk.
Challenges of Having No Credit
If you don’t have credit, it could prevent you from qualifying for things like:
- Financing for a mortgage, credit card, auto loan, personal loan, etc.
- Apartment rental since most leasing agents and property owners will run a credit check
- Better interest rates and loan terms
Try to establish some kind of positive credit history as soon as possible. That way, you’ll be prepared for any major life events that require financing.
8 Ways to Build Credit
If you have limited or no credit history, it can be tough to qualify for financing or get the best rates. Fortunately, you have options.
Apply for a Secured Credit Card
A secured credit card requires a security deposit — usually around $200 — that usually serves as your limit. Because of this, they’re less risky to credit card issuers and are fairly easy to qualify for.
Once you have the secured card, you can use it for small purchases. Each month, you’ll need to make at least the minimum payment on the card. The card issuer will report your payment activity to the bureaus, resulting in a credit score increase. However, if you fail to make a payment, the issuer will use the deposit instead.
Secured cards usually come with higher interest rates than unsecured cards, so it’s best to pay off your balance in full each month.
Secured credit cards tend to be less of a risk for issuers since you yourself are providing a security deposit.
Best Secured Card for No Credit
The OpenSky Secured Visa Credit Card is best for no credit borrowers since it doesn’t require a credit check. The issuer reports to all three reporting bureaus and is a great way to establish credit.
Apply for an Unsecured Credit Card
Unlike a secured card, an unsecured credit card has a starting credit limit based on factors like your credit score and income. Your interest rate and approval odds are also based on your score. Because of this, this option is best for those with some credit history and good credit.
Best Unsecured Card for No Credit
The best credit card for students or borrowers with no credit is the Discover It Student Cash Back card. It offers up to 5% cashback and doesn’t have an annual fee.
Apply for a Credit Account with a Favorite Store
Some retailers, such as Kohl’s and Best Buy, offer store cards. These work like regular credit cards but can only be used at a specific store (you can tell the difference because they won’t have a Visa or MasterCard logo). Some stores offer different benefits, such as discounts or promos, so check for that when applying.
Most store cards have higher interest rates than unsecured credit cards, but they’re also easier to qualify for. Plus, you can use them to improve your credit score by making payments on time and keeping credit utilization low.
Become an Authorized User on a Family Member’s Account
If someone in your family has good money management habits and a high credit score, ask to become an authorized user on their account. This will add the account to your credit history and give you access to their credit card. As long as you and the account owner use the card responsibly, you can build credit.
Some card issuers charge a small annual or service fee, but becoming an authorized user is usually free. Check with the issuer about their policy.
Build a Good Credit Mix
It’s better to have different types of credit, such as auto loans, installment loans, and student loans, than it is to have multiple credit cards. Having a good mix of credit from the get-go can help improve your credit score more quickly. However, don’t try to take out multiple new loans at once. Also, only apply for financing you can afford.
A credit-builder loan is best for people with no credit or those who are “credit invisible.” With this loan, you set up a savings account or certificate of deposit (CD) with a lender. Then, you make monthly payments over a span of time – usually 6 to 24 months. During this time, the lender will report your activity to the bureaus, which helps build credit.
Once you’ve “paid off” the loan, you’ll gain full access to the money in the account. This amount will also include interest minus the lender’s fee in some cases.
If you’re interested in a credit-builder loan, check out Self. This online lender has an easy application process, reports to all three bureaus, and has helped over a million consumers establish credit.
Take Out a Student Loan
If you’re planning to attend college, consider taking out a federal student loan. These loans are easier to qualify for than private options and don’t typically require a minimum credit score. They also work like any other installment loan, meaning you make monthly payments over a span of time.
As long as you make on-time payments, you can start building your credit score. Plus, a student loan will add to your credit mix, thus helping your score even more.
There are also private student loans, but these lenders often have higher requirements, such as a minimum credit score or a co-signer.
Sign Up for Experian Boost
Offered through Experian, Experian Boost can help improve your credit score. Experian Boost lets you add accounts for things you pay through your bank account, like utilities or a monthly subscription to Netflix, to your Experian credit file. This can boost your score and credit history. The downside is that it only helps with your Experian credit score.
Focus on Developing Good Credit Habits
Understanding what makes up your credit score is essential to improve it. This includes:
- Your credit mix — different types of open accounts
- Debt to income (DTI) ratio — percentage of monthly debt vs. income
- Credit utilization — percentage of credit available compared to the amount used
- Payment history — on-time payments, late payments, etc.
Know your credit limits, keep your balances low, and make payments on time. A single misstep could drag down your credit score for months or even years.
Should You Pay for Credit Monitoring?
Credit monitoring is a service that tracks your credit score and spending habits. Some services also offer protection from fraud or identity theft. Whenever there’s suspicious activity or a notable change, the service will notify you.
Some credit monitoring services are free, such as those offered by most major credit card issuers. But others come with a small monthly charge. A basic service could cost around $8 a month, while a premium service might cost upwards of $35 a month.
If you’re just starting out and have little to no credit, you should be able to monitor your own credit reports without a service.
The Bottom Line
Ultimately, your starting credit score depends on your own situation and financial habits. However, your first score doesn’t matter as much as what you do with it and how you go about building it up. Try to establish a score early on and start improving it from there. That way, you’ll benefit from the best forms of financing, lower deposits, better premiums, and more.
A line of credit is essentially how much credit you have available. In other words, it’s your borrowing limit. You can use it to make purchases, which will be subject to interest if you don’t pay off your balance in full each month. The interest rates on a personal line of credit tend to be lower than on other forms of financing.
Some lines of credit come with a draw period, which is a period of time you can freely use it. For example, the home equity line of credit (HELOC) has an average draw period of 10 to 15 years. During the draw period, you only make payments on interest. Afterward, you must make regular payments to pay off the balance.
Yes. It’s federally authorized to give you a free copy of your credit report from each credit reporting agency.
Hard inquiries occur when a lender or prospective landlord requests your credit report, usually during the application process. Each hard inquiry can lower your score by a few points, though it usually returns to normal in a few months.
Most auto lenders use both the FICO and VantageScore models during the approval process. Some lenders will only use the FICO Auto Scores, though. Usually, other factors like your DTI ratio and income also affect your approval odds and interest rates. While there is no minimum credit score required for a car loan, you’ll receive better terms with a 670+ FICO or 661+ VantageScore.