If you are a young adult starting to apply for credit cards and are preparing to take out your first education or auto loan, you may be wondering what credit score you’ll start with! In this blog, you’ll find out all the details regarding whether you begin at the highest possible score, lowest, or somewhere in the middle.
Starting without a credit score does not mean you start at zero. At this point, your score doesn’t exist, which is calculated only when a lender or a credit card issuing authority requests to check it for you.
When you start building your credit history, you might assume that your credit score starts at 300. It is unlikely to start with such a low score unless you start with very poor credit habits. It is also unlikely to start with the highest score of 850.
How is credit score calculated?
A credit score is mostly calculated based on your credit report, but the following five factors are also taken into consideration.
1. Your payment history
The most important factor that influences your credit score is your payment history. It accounts for 35% of your FICO score, highlighting the relevance of paying your bills on time. This is what determines your creditworthiness and your eligibility for loans.
2. Your credit utilization
This refers to the amount of revolving credit available to you that you are using. The credit utilization ratio is calculated by dividing your current amount of revolving credit by all your revolving credit limits.
The ideal credit utilization ratio is under 30%, which is possible if you keep your balances as low as possible. Credit utilization accounts for 30% of your FICO score.
3. Your length of credit history
Your credit history attributes to 15% of your FICO score. The longer your credit history is, the more information it provides to credit bureaus, reflected in the form of higher credit scores. Lenders want to see if you have a history of responsible borrowing or not.
4. Your credit mix
Your credit mix, comprising two different types of credits, accounts for 10% of your FICO score.
There’s installment credit, which includes any sort of loan, mortgage, or a set amount that you need to pay each month. Then there’s revolving credit, which allows you to pay certain credit amounts and either pay it in full each month or carry it forward as long as you keep making small payments.
Diverse borrowing history can work in your favor and show the lenders that you are a responsible borrower.
5. Your new credit
Your new credit accounts and the number of hard inquiries on your credit report make for 10% of your FICO score.
A hard inquiry is when a lender evaluates your credit report to decide on your application. Several hard inquiries within a short period can hurt your credit score.
Also Read: How Do Credit Repair Services Work?
What credit score do you start with?
It takes six months of account activity to build credit and start at a score of around 500. There’s no one rule to determine or calculate the credit scores for different people since everyone’s financial situation is different.
Despite paying bills on time, you may have a lower starting credit score. Someone who has less student loan debt than you can get a better credit score advantage.
How to build and sustain a good credit score?
According to the FICO model, a score of 670 or above is considered good and a score of 800 or above is considered exceptional.
As per the VantageScore model, a score of 661 or above is considered good and a score of 781 or above is considered excellent.
With a high credit score, not only can you become eligible for a loan quickly but can also obtain it with favorable terms and conditions.
There are plenty of things to take care of while building and sustaining a good credit score.
Here’s what you can do.
Own and use credit cards responsibly
Using credit cards responsibly can go a long way and help you to build a good credit score. Keep your credit utilization ratio under 30% and always pay your bills on time.
You can apply for a credit card if you don’t have one, use it for small purchases, and pay your bills on time in full every month.
If you don’t qualify for a general-use credit card due to no credit history, you can consider the following alternatives.
* You can apply for a secured credit card, for which you need to put down a deposit that becomes your credit limit. The deposited money does not cover your monthly payments, which you need to make separately.
Ensure that your credit issuer reports your payments to the three credit bureaus, Equifax, Experian, and TransUnion.
* Get a store credit card, which is much easier to get. Do make sure to make your monthly payments on time because these types of cards charge high interest.
* You can ask for a favor from a family member with a good credit score to add you as an authorized user on their credit card. You’ll get your own credit card to use and receive the benefits of their credit history.
Use loans to your advantage
One of the easiest ways to build your credit score is to make your loan payments on time. Whether it is a student loan, a car loan, or a personal loan, make your payments on time and build a good and sturdy credit score. A few smaller banks and credit unions offer credit-builder loans to help you establish credit.
Other than this, you should try to build your savings, avoid opening any new accounts, and continue to monitor your credit reports.
Starting your journey in the credit world may seem complex and tedious, but with a disciplined and responsible approach, you can improve your credit score in no time.
A good credit score can open a world of opportunities for you to secure better financial stability and future.