Everybody knows the importance of having an excellent credit score.
For some it means a lower APR on that brand new Lexus they’ve been looking at.
For others it means that they can get approved to get into their forever home.
On the flipside, if you have bad credit it could be the brick wall between you and your forever home.
Or it could mean that you’ll have a higher interest rate on your car loan which means you will be paying more.
And as we all know – Saving money is critical to being able to survive in today’s world.
That begs the question…
What credit score do you start with?
What if I never applied for any kind of credit in my life? What happens then?
Do I have a credit score if I never applied for any kind of credit card or took any kind of loan out?
This quick and to the point article will break down how credit scores work, how your starting credit score is calculated, and how to build yourself a great credit score even if you don’t have any credit right now.
What Does Your Credit Score Start At?
This answer isn’t so “cut and dry”, because it really depends in what way you actually start using credit.
Some people out there think that their score starts at the lowest possible FICO amount, while there’s others out there that believe they have a starting score of zero…
In all fairness, there isn’t any real “starting credit score”. Each person starts building their credit score by the method in which they actually use credit.
For instance, if you haven’t used credit before, I encourage you to sign up with experian.com and check your credit file.
If you do this, you’ll notice that your FICO score will yield a return message with something like, “Sorry, your credit report does not have enough information at this time.”
That simply means that your credit report has nothing on it and therefore it does not yield any kind of score.
Once you open your first credit account, you’ll start building your credit once your lenders report your activity to the three major credit bureaus AKA (Experian, Equifax, and Transunion).
From our friends at FICO, the minimum scoring criteria is below:
1. One credit account minimum, opened for six months or more.
2. At least one credit account that has been reported to one of the three major credit bureaus within the past six months.
How Is Your Credit Score Calculated?
Payment History: 35% of your credit score is calculated by the history of your previous payments. Paying on time every single month will keep this metric positive which is what you need when you’re trying to build your starting credit score.
Amount of Debt (Credit Utilization Ratio): Virtually just as important as payment history, the amount of debt you carry to the amount of debt you can actually spend has an enormous impact on your credit score.
For instance, my credit score dropped by 7 points because I made the mistake of keeping my balance too high when the lender reported to the bureaus.
Ideal credit utilization ratio is under 8%. Know that if you have over 20% you will be doing yourself harm in the form of a lower credit score.
When you’re starting out to build your starting credit score, use the card less as a way of paying for things, and more as a tool to build your credit.
In other words, if you have a starting credit card with a $300 credit limit, don’t spend more than $30 or you run the risk of hurting your credit score.
Length of Credit History: While not as important as the above two points, the length of time your accounts are open and in good standing will help your starting credit score rise, and quite significantly.
Although, late payments or otherwise negative payment history will affect your credit score adversely.
As your accounts age, they become more weighted when it comes to helping your starting credit score grow as fast as possible.
New Credit (Inquiries): Why you apply for a new credit line, whether a loan or a credit card, the lender will pull your credit file.
This is known as a “hard inquiry” AKA “hard pull”.
Hard inquiries do affect your credit score, so you want to keep these to a minimum.
Generally, hard inquiries don’t have a huge impact on your score (give or take a few points), but applying for new credit cards or loans does look unfavorably when under manual underwriting.
While an inquiry stays on your credit report for 24 months (2 years), FICO scores only reflect inquiries that have been run within 12 months.
As I mentioned above, if you have somebody manually pulling your credit report and looking into it for loan purposes, applying for a bunch of accounts could be looked at in a negative light.
Credit Mix: Credit mix refers to the different types of credit you have in your credit file.
A great way to increase your starting credit score as fast as possible is by having multiple different kinds of debt.
Having an Installment loan (car loans, student loans) along with a couple lines of revolving debt (credit cards), is a surefire way to increase your credit score so long as you pay your bills on time.
What Are The FICO Credit Score Ranges?
Another key piece of knowledge you need to know is the score range breakdown on the FICO credit scale.
The FICO scores range from 300 to 850 and they are grouped into the following clusters:
- Exceptional: 720-850
- Good: 690-719
- Fair: 630-689
- Poor: 300-629
Knowing this score breakdown is critical when starting to build credit for the first time because you’ll have an understanding of where you stand once you have enough tenure on your credit file to have a credit score.
The goal here is to get to the “good” range as fast as you can. Once in the good credit range, you’ll have no problems when you apply for the best credit cards for good credit.
Furthermore, you stand a better chance to get a mortgage, rent a home, get that brand new Lexus, and much more.
Can You Have A Credit Score Without A Credit Card?
Sometimes I get asked, “can I have a credit score without a credit card?”
My answer is always a YES.
You can definitely have a credit score without having a credit card (otherwise known as revolving debt).
Remember above when we talked about how the mixture of different types of credit cards affect your credit score?
Well if you applied for a student loan, a car loan, or any other kind of installment debt… And you were approved – you’ll have a credit score based on how you handled that account.
If you had great credit history and you treated the debt responsibly, then your credit score should be decent.
If, on the other hand, you had derogatory items such as late payments or, even worse, charge-offs then your credit is probably poor or near poor.
How To Check Your Credit Score
One of the most overlooked items when it comes to building your starting credit score is to actually check your credit report.
You’d be surprised at just how many times people check their credit score thinking they have no credit history, only to find out that they have a credit score.
And a bad one at that!
I don’t want to scare you, but the thing is identity theft does happen.
It’s important to check your credit score to verify where you are, so that you can start to build your credit score the right way.
I always recommend checking your credit score with somebody like Experian because they provide you with the FICO score for free.
There’s also banks and credit card issuers that give you access to free credit scores as well.
You can grab your 3 bureau credit report for only $1 (cancel your plan within the 7 day trial and you won’t be billed the monthly access charge)
But if you use a platform like IdentityIQ.com, I encourage you to keep your membership so that you can pull your credit once a month.
Credit is a long term game.
Because your lenders report to the bureaus once per month, the only way to actually see your credit score growing or declining is to get your report every month.
If you have the financial means to pay for the IdentityIQ membership, I highly recommend it.
Contrary to popular belief, you do not start your credit lifespan with a zero credit score.
Regardless of where you start, the most important thing to remember when building your credit is that you start off positively and not negatively.
Like I said, credit building is a long term game.
And so is credit destroying.
Late payments and other derogatory items stay on your credit report for a long time.
It isn’t hard to build a good credit score.
Being disciplined when starting out, learning how credit works, and never biting off more than you can chew is a great way to build your starting score.
Hope that helps. If you have any questions or comments please leave us a message down below.