Your credit score is a snapshot of your credit history and plays a major part in determining what kind of financial products you have access to.
But if you're in the early stages of your financial journey, you might be wondering where to start.
That's why we've put together this guide to help you learn how your credit score works, where it starts, and how to build it over time.
Where does your credit score start and why?
Where your credit score starts depends on several factors.
If you've never used credit, you probably don't have a credit score. But don't worry — having no credit score isn't the same as having a bad credit score. It just means your score doesn't exist yet.
Your credit score is calculated when a lender, credit card issuer, or other financial institution requests it to determine how risky it is to lend you money. But your information isn't reported until you've had credit in your name for at least six months. If you don't have any history of using credit, there's no information on which to base the calculation.
Once you begin to establish a credit history, your first credit score will grow based on your credit habits. The higher you score on a scale of 300-850, the lower your risk to potential lenders.
Unless you have very poor credit habits, you probably won't start at the bottom of the scale. The same goes for top scores — when you're just starting out, you don't have a long enough credit file to get an excellent credit score.
How your credit score is calculated
FICO and VantageScore use different credit scoring models to analyze your credit reports and determine what score they give you. Although the details of those calculations are proprietary, you can usually expect your score to be determined by the following factors:
Payment history (35%)
Your payment history reflects your tendency to make your monthly payments on time. This includes payments for credit cards, lines of credit, student loans, car loans, and other personal loans. If you fall behind on payments by 30 days or more, your credit score takes a hit.
Credit utilization (30%)
The amount of your available credit that you use at any given time determines your credit utilization ratio. For example, if you spend $500 on a credit card with a $5,000 limit, your utilization ratio for that card is 10%.
Length of credit history (15%)
Although a longer credit history doesn't automatically lead to a better credit score, it tends to include more evidence of timely payments and makes an overall better impression than a shorter history.
New credit (10%)
Whenever you apply for a credit card or loan, lenders inquire into your credit report, which docks a few points from your credit score.
Credit mix (10%)
Your credit mix refers to the variety of different types of credit accounts you have, like credit cards, lines of credit, and different types of loans. The more variety, the better your score.
What does it all mean?
Having a credit score means you've built enough credit history for lenders to be able to determine what type of borrower you are.
Here's a breakdown of how your credit score works and what it might mean to lenders:
What is the average credit score?
In the United States, the average credit scores for 2021 are 698 (for VantageScore) and 711 (for your FICO score).
What do you qualify for based on your credit score?
Your credit score plays a significant part in establishing your creditworthiness and determining what kinds of financial products you're eligible for.
Here's a breakdown of what you can expect:
- Poor (300–559): A score in this range means you won't qualify for most loans or credit cards. The products available to you will usually require a deposit or co-signer, and you'll pay much higher interest rates.
- Fair to good (580–739): A fair-to-good credit score gives you access to most loans and credit products, but the terms and interest rates won't be as favorable as those offered to people with better scores.
- Very good to excellent (740–800+): When you reach the high end of the scale, you gain access to the best credit cards and loans, low interest rates, more lenient terms, and perks.
What are the consequences of having a poor credit score?
A bad credit score means you'll be less likely to be approved for credit cards or loans, and the products you will have access to will usually offer less favorable terms, like high interest rates or annual fees.
But fear not — bad credit doesn't last forever. By using credit rebuilders — like secured credit cards, low-limit credit cards, and credit-builder loans — you can start rebuilding your credit in a matter of months.
3 tips for maintaining a good credit score
If you're just starting to build credit, there are a few tried and tested ways of ensuring your score remains strong.
Pay your bills on time
Your payment history and credit utilization are the two most important factors that determine your credit score. By paying your bills on time and keeping your balance below 30% of your total credit limit, you'll demonstrate to lenders that you're a reliable borrower.
Limit your requests for new credit
Every time you request a new credit card or loan, lenders make a hard inquiry into your credit report, which knocks a few points off your credit score. That's because opening too many new credit accounts makes you look desperate to borrow funds that you're unlikely unable to repay.
Keep old credit accounts open
The length of your credit history counts for 10% of your score, so it's a good idea to keep old credit card accounts open, even if you don't use them anymore. Keeping accounts open also increases your overall credit limit and improves your credit utilization.
How can I check my credit score?
Many financial institutions offer a free credit score online. You can also request one free copy of your credit reports per year at AnnualCreditReport.com. Three major credit bureaus compile credit reports: Equifax, Experian, and TransUnion.
What is insufficient credit history?
When you're just starting out, it's not uncommon to have an insufficient credit history. It just means that your credit history isn't old enough for scorers to evaluate your credit behavior.
The bottom line
Understanding how your credit score works is essential to starting your financial journey on the right foot.
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