Your credit score is based on a complex calculation that can seem difficult to understand. Even from the beginning of your credit score journey, things can get muddled.
A common question when establishing credit is, “What credit score do you start with?” You may wonder if your credit score starts at zero and rises from there. Or maybe it starts at a perfect 800 score and drops if you have a financial misstep. The answer falls somewhere in between.
Below, we’ll cover the credit score you start with, what your credit score means and how to overcome the challenges of establishing and increasing your credit score.
It’s logical to think your credit score starts at the bottom and grows as you build credit history, but this isn’t the case.
Once you get one or more credit accounts on your credit report and start using them, you’ll receive a FICO Score. This first credit score will range between 300 and 850, depending on how well you manage your credit.
Before you’ve established credit history, you have no credit score. If a creditor does a credit check and you have no credit history, it will say something like “insufficient information” instead of listing a credit score.
Not having a credit score and credit history makes it difficult to get a credit card or loan. Lenders have no data to help them determine whether you’re a high credit borrower, resulting in rejections or unfavorable terms.
Your FICO credit score ranges from 300 to 850 with different tiers of creditworthiness:
- 580 or less: Poor credit
- 580-669: Fair credit
- 670-739: Good credit
- 740-799: Very good credit
- 800 and up: Excellent credit
Your FICO Score is based on your credit report from each of the three major credit bureaus: Experian, Equifax and Transunion. Your credit report is a rundown of your credit accounts for the past 7-10 years.
Your FICO Score encompasses five key factors from your credit report:
- Payment history: Your payment history is 35% of your FICO Score, making it the most critical factor. It considers whether you pay your credit accounts within 30 days of the due date. Payments more than 30 days late may result in a credit score drop.
- Credit utilization: The second most important factor in your FICO Score is credit utilization, which accounts for 30% of your score. This factor looks at the total balances on your credit cards and other revolving debts relative to your total credit limit. If your credit utilization rate exceeds 30%, you may see a dip in your credit score.
- Length of credit history: This factor accounts for 15% of your FICO Score. It considers the average age of your credit accounts and the age of each account. The older your average account age, the more positively it impacts your credit score. If you open a new account or close an older account, you may see a small decrease in your credit score.
- Credit mix: Your credit mix accounts for 10% of your FICO Score. Credit mix is the balance of different types of credit on your report, including credit cards, lines of credit, retail credit accounts and installment loans. If you have several types of credit, it can improve your credit score.
- New credit: This accounts for 10% of your credit score and factors in new credit accounts and hard inquiries in the past 12 months. You may see a slight credit score decrease if you open multiple new accounts or have several new credit inquiries on your credit report within a year.
Each credit report’s data can vary slightly, so you may have three different FICO Scores. Lenders often look at the middle score when pre-qualifying you for a loan or credit card.
You’ll find many free credit score websites. Generally, these sites don’t offer your FICO Score. Instead, they provide an estimate based on their own calculations. You may not know your exact FICO Score, but you’ll learn if your credit score is trending up or down.
Experian offers a free credit score tool, and it’s one of the few that includes your FICO Score at no cost. However, this is only your FICO Score based on your Experian credit report. If you want your FICO Score based on Transunion and Equifax, you must pay.
Federal law requires Experian, Equifax and Transunion to offer every American one free credit report per year. You can get this report from AnnualCreditReport.com, but it doesn’t include your credit score.
Establishing a credit score can present a few challenges. Namely, you need a credit account in your name to build a credit score, but you need a credit score to get approved for many credit accounts. This can leave you wondering where to start.
Fortunately, there are several options to establish your credit.
A secured credit card works like a traditional credit card but with one key difference: You must pay a security deposit. This refundable security deposit is generally the same amount as your credit limit. It protects the credit card issuer if you fail to repay your debt.
With a secured credit card, you pay the security deposit before receiving the card. The credit card issuer places the deposit in an account and uses it only if you default on the credit card. You can use a secured card like any other credit card.
If you keep your credit utilization rate at or below 30% and make on-time payments, you’ll establish a credit score that could increase over time. Eventually, you may have a FICO Score that’s high enough to get a traditional credit card.
Secured credit cards are helpful when building credit, but they come with a few downsides:
- The security deposit may be too large for you to pay upfront.
- Secured credit cards often have an annual fee.
- If the credit limit is low, the annual fee may take up a large portion of the limit.
As an authorized user, you become a secondary account holder on a credit card. You’ll receive a credit card attached to the account in your name, but you can’t make changes to the account, such as requesting a credit limit increase.
When you’re an authorized user, your credit report will include the credit card. This places an established credit account on your credit report, which may help build and improve your credit score.
However, if the primary cardholder exceeds 30% credit utilization or makes a late payment, you may see your credit score drop.
A credit-builder loan is a small installment debt. The money you borrow is placed in a savings account instead of given to you directly. You then make payments as arranged. Once you pay off the loan, the lender releases the funds to you.
By making on-time payments to the lender, you establish credit and potentially improve your credit score.
If you’re a college student or taking courses, a student loan is an effective way to establish your credit. Lenders don’t require credit checks for most federal student loans. Once you start repaying your loans after graduating, you can establish and improve your credit score.
To establish your credit through a traditional installment loan, like an auto loan or personal loan, a cosigner can help. Although a cosigner may not make the monthly payments, they share the financial responsibility of the loan with you.
With the cosigner’s good credit, a lender may approve you for a loan, even if you have no credit. After making on-time payments, you’ll establish and build your credit score.
If the cosigner has bad credit, you may not get approved. Also, if you make late payments or default on the loan, it may negatively impact the cosigner’s credit.
In general, a good credit score means you’ve managed your finances well and are a low financial risk for potential lenders.
As a low-risk borrower, you may enjoy certain benefits, including:
- Lower interest rates
- Higher credit limits
- Access to the best cash-back credit cards
- Larger loan amounts
- Favorable loan-repayment terms
- Approval for a cell phone plan
- Approval for a rental property
Keep in mind that most lenders look beyond your credit score to measure creditworthiness. They look at other financial indicators, like debt-to-income ratio — the percentage of your income that goes toward minimum monthly payments — to determine your eligibility for a loan or credit card.
You can have an excellent credit score and still be declined for a loan if you don’t meet other qualifications, such as the lender’s debt-to-income requirements.
When you begin building credit, your FICO credit score doesn’t start at zero. Instead, it lands somewhere between 300 and 850 once you establish one or a few credit accounts.
Starting with a clean credit report is an opportunity to build a solid base for your finances. However, it comes with its own set of issues. A lack of credit makes it hard to get approved for the credit accounts you need to establish your FICO Score.
There’s a wide range of tips and tricks to overcome this challenge and establish your credit score, including:
- Becoming an authorized user
- Taking out a secured credit card
- Using a credit-builder loan
- Taking on a student loan
- Using a cosigner to get a traditional loan
Once you’ve established your FICO credit score, you can continue to build it through careful debt management. Over time, you may reap the financial benefits of an excellent credit score, including lower interest rates, more financing options, higher credit limits and more.