Understanding Your Starting Credit Score

By the Pachyy Editorial Team The Pachyy Editorial Team comprises a diverse and experienced team of writers, researchers and subject matter experts whose aim is to provide you with useful insights, guidance and commentary on all matters related to your personal finances.

Did you know that everyone’s credit score start point can be different? It all depends on your previous financial history. In cases where there isn’t a long credit history or no initial credit score, individuals are known as “credit invisible.” Financial institutions utilize your credit score to determine your eligibility for loans, credit lines, and housing. Your credit score impacts your financial opportunities and the amount you’ll have to pay out of pocket. But if you haven’t established any credit accounts yet, you might be wondering what credit score you actually begin with. We’ll delve into how borrowers can build their credit scores and explore the possibility of achieving a perfect credit score.

What Is the Starting Credit Score?

If you haven’t got a FICO credit score yet, which is used by 90% of lenders¹, you might be curious about where your credit score begins. About 45 million adults in the United States have no credit history². When you have no credit history, it means there isn’t enough information available to generate a credit score. Not having an established credit score can make it challenging for you to take advantage of financial opportunities. However, building a credit history will allow you to establish credit scores gradually over time. There are several ways to establish a credit history, but the most common approach is to acquire a credit line or loan. After getting approval for borrowing money, it generally takes about six months of activity to obtain your first credit score. Credit scores are extremely important to lenders, even though they are a relatively recent invention. They were developed as an unbiased tool for financial institutions to assess borrowers. In today’s modern era, a three-digit number represents your creditworthiness. Fortunately, you have the ability to improve your average credit score, which can lead to better loan terms and more opportunities.

Understanding Credit Reports

Let’s talk about what credit reports are and how they can help you. Credit reports provide a detailed summary of your credit history, including financial information collected by three major credit bureaus: TransUnion, Equifax, and Experian. Lenders use these reports to assess your economic activity and make decisions based on that. Both you and authorized users, such as landlords, lenders, and insurance companies, can request and view your credit reports. There are two types of credit checks: soft and hard.

Soft Credit Check: Also known as a soft pull, this kind of credit check doesn’t affect your credit score. It’s usually done as part of a background check and doesn’t show up on your credit reports.

Hard Credit Check: Also known as a hard pull, a hard credit check may slightly lower your credit score. When you apply for accounts like personal loans or car loans, the lender will request and review your credit reports to make an approval decision. This type of inquiry stays on your credit report for two years.

Each credit reporting agency offers one free credit report annually, which allows you to check your credit score for free. You can access your free credit report through the Annual Credit Report website or by calling 1-877-322-8228. You can decide how many reports you want and which credit bureau’s report you’d like to receive. For example, you can specifically request the Experian credit report. To keep track of your credit score throughout the year, consider requesting a credit report every four months.

What Information Do Lenders See on Your Credit Report?

Your credit report contains important information that lenders use to confirm identities and assess creditworthiness.

Identifying Information

Your credit report provides your full legal name, address, phone number, and Social Security Number. If you listed any employers on a credit application, they will also be visible.

Credit Accounts

Your credit report shows both open and closed accounts. Closed accounts are removed after seven years. Lenders can view account opening and closing dates, debt amounts, credit limits, and payment history. They can also see any missed or late payments.

Credit Inquiries

All loan and credit line inquiries you make will be visible. Lenders can see which financial institution you applied to and the date of the credit checks.

Public Records

Unfortunately, financial institutions have access to negative information on your credit report. This includes bankruptcies, collection accounts, foreclosures, civil suits, and judgments. If you have any personal property with a lien, that information will also be visible.

What are the 5 Factors that Affect Your Credit Score?

Your credit score is influenced by various factors, which can differ depending on the credit scoring model used by a credit bureau. The two commonly used models are FICO and VantageScore. These five factors play a significant role in determining your initial credit score:

Credit Score Factors and Their Impact	Description
Payment History (35%)	This factor takes into account your payment behavior, including whether you pay bills on time, have any late or missed payments, or have accounts in collections.
Credit Utilization (30%)	This factor measures how much of your available credit you are using. It’s calculated by dividing your credit card balances by your credit limits.
Length of Credit History (15%)	The length of time you’ve had credit accounts, including the age of your oldest account, the average age of all your accounts, and your most recent account activity.
Credit Mix (10%)	This factor considers the different types of credit accounts you have, such as credit cards, loans, student loan options, personal loans, mortgages, car loan options, and retail accounts.
New Credit Inquiries (10%)	This factor examines how often you apply for new credit.

Keep reading to gain a better understanding of these factors and how they impact your credit score:

Payment History

Your payment history is crucial for calculating your credit score, accounting for 35% of the total score. Making consistent on-time payments is essential in building a good credit score. Late payments can lower your credit score and make it more challenging to qualify for loans. Financial institutions often impose late fees, which can cost you a significant amount of money in the long run.

Credit Utilization

The amount of credit card debt you carry can negatively affect your credit score. Credit utilization makes up 30% of your FICO credit score. To achieve an excellent credit score, it’s recommended to use no more than 30% of your credit limit. You can calculate your credit utilization ratio by adding up your total credit limits and credit card debt. Divide your credit card balance by your total credit limit, and then divide the result by 100. This percentage is your credit utilization ratio. If you exceed the recommended amount, it’s important to prioritize paying down your credit card debt to maintain a good credit score.

Length of Credit History

Your credit history length accounts for 15% of your credit score. Although you can’t change this category, having an active credit account for a longer period of time without any late payments can have a positive impact on your credit history and score.

Credit Inquiries

The number of credit inquiries you make within a year contributes to 10% of your credit score. Each time you apply for a credit line or loan, it is recorded as an inquiry on your credit report. Submitting multiple loan applications can decrease your credit score by a few points, and excessive inquiries can significantly damage your score. It’s advisable to avoid unnecessary credit inquiries to maintain a healthy credit score.

Credit Mix

Your credit mix comprises 10% of your credit score. While having a combination of installment loans and revolving credit accounts can boost your score, it’s still possible to achieve a good credit score without multiple financial accounts. Lenders primarily want to see your ability to manage your accounts responsibly.

What Is a Good Credit Score?

A good credit score plays an important role in your financial wellbeing. Credit scores range from 300 to 850 points, with higher scores resulting in better terms from lenders. Here are the credit score ranges:

Poor — 300-579
Fair — 580-669
Good — 670-739
Very Good — 740-799
Excellent — 800-850

Most financial institutions prefer applicants with a minimum credit score of at least 700 points, which falls into the good category. If your credit score is poor, it can limit your financial options and make approval more challenging. However, there are lenders who offer bad credit loans with flexible minimum credit score requirements, although they usually come with higher interest rates.

Financial Tools to Help You Build Credit Scores

If you’re looking to start building your credit file, these financial tools can be really helpful. Sometimes it can be challenging to qualify for financial accounts if you don’t have an established or limited credit history. But don’t worry! There are specific financial tools designed to assist consumers in obtaining a starting credit score.

Use a Secured Credit Card

Many credit card issuers offer secured credit cards to new borrowers who are eager to start building credit. Secured credit cards require a security deposit, which then becomes your credit limit. For example, if you deposit $300, you can spend up to $300. By using your credit responsibly, you can improve your credit score. The best part is that you can usually expect to get your deposit back from a secured credit card.

Consider Taking a Small Personal Loan

Personal loan amounts can vary widely based on your financial needs. If you’re just starting out and want to establish credit, taking out a small loan that you can pay off quickly can help you build credit. Different lenders have different minimum credit score requirements, but many offer flexible requirements.

Apply for a Retail Credit Card

Getting a retail credit card is generally easier than obtaining a traditional one. Retail cards usually don’t require a security deposit, and many even offer discounts for borrowers. If you’re eager to build credit, think about applying for a retail card at your favorite store. By maintaining a low balance and making on-time payments, you can achieve a good credit history and work on building credit. However, be careful not to overspend or exceed your credit limit!

Benefit from a Credit Builder Loan

A credit builder loan is specifically designed for borrowers with limited credit history. Instead of getting the money upfront, the borrower makes payments to the lender, which gets reported to at least one credit bureau. These payments are then allocated into a savings account. Once the payments are completed, the borrower gets back the funds along with interest. Meanwhile, they build positive credit as long as they make their payments on time.

Become an Authorized User

If you’re not yet ready to obtain your first credit account, you can become an authorized user instead. Anyone with a credit card can add you as an authorized user to their account. As an authorized user, you’ll get your own credit card to make transactions, but you won’t be financially responsible for the billing. By being an authorized user, you can gradually start building credit without applying for a credit card yourself. However, remember that both credit scores can be negatively affected if the account is not managed responsibly.

Frequently Asked Questions About How Credit Scores Start

Below are some common questions that people may have about credit scores: How often is my credit score updated? Your credit score typically updates every 30 days, although the timing can vary based on when your creditors report your information to the credit bureaus. To ensure accuracy and keep up-to-date, it’s advisable to regularly check your credit report. Will checking my own credit score lower it? No, checking your own credit score is considered a soft inquiry and does not have any negative impact on your credit score. Feel free to check your credit score as often as you like without worrying about it affecting your credit. What should I do if I find an error on my credit report? If you come across any inaccuracies or incomplete information in your credit report, it is important to reach out to both the credit bureau that generated the report and the company that provided the information. Both entities are responsible for rectifying any errors, but you need to initiate the process. Is it still possible to get a loan or credit card with a low credit score? Yes, it is possible to obtain a loan or credit card with a low credit score, but it may be more challenging and you may be offered higher interest rates. Some lenders specialize in assisting individuals with low credit scores, so it’s worth exploring those options. What can I do to quickly raise my credit score? To improve your credit score promptly, ensure that you pay your bills on time, reduce your debt, and keep your credit card balances low. However, it is crucial to remember that raising your credit score takes time and there are no instant fixes. Will closing a credit card account affect my credit score? Yes, closing a credit card account can impact your credit score. It can decrease your available credit and increase your credit utilization ratio, which may lower your score. It is generally recommended to keep your oldest credit card account open to maintain a longer credit history.

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