What Does a Credit Score Start At?

What does a credit score start at? If you are new to the financial industry, you may be wondering if you have a credit score of zero or any credit at all. Here you’ll learn more about where your credit score starts and how you can work up to and maintain a healthy credit history! 

What Is a Starting Credit Score?

What is an initial credit score? You may think that a zero credit score is the starting point for people new to finances. But this is not true. Your first credit score will most likely be 300, as this is the lowest score credit scoring models usually recognize. 

Credit scores range from 300 to a perfect score of 850. Here’s a breakdown of how most lenders view different credit scores: 

  • Excellent credit: 800-850.
  • Very good credit: 740-799.
  • Good credit: 670-739.
  • Fair credit: 580-669.
  • Poor credit: 300-579.

How Do Credit Scores Work?

A credit score is a three-digit number that indicates a borrower’s creditworthiness to a lender. A higher score indicates financial responsibility, while a lower score indicates a borrower may be a financial risk. 

Your credit files and data are recorded by major credit reporting agencies and given to lenders and financial institutions upon request. The three major credit bureaus are Experian, TransUnion, and Equifax. Before you receive approval for a loan or another financial product, your lender will most likely reach out to one of those three credit bureaus for your official credit report. 

What Is the Difference Between a Credit Score and a Credit Limit?

It is essential not to confuse credit scores with credit limits. A credit score is a part of an individual’s financial history and helps lenders determine eligibility for loans and other financial products. A credit limit is an indication of the maximum amount of revolving debt an account holder may accumulate in a billing cycle. 

How Are Credit Scores Calculated?

How is a credit score calculated? Generally, five main financial factors go into determining a credit score. Check out more information on those factors below. 

Payment History (35%)

Payment history accounts for 35% of your overall credit score, making it the most influential factor. To have a pristine payment history on your credit report, you want to make payments for your bills, loans, and other expenses on time. Missing payments may result in a decline in your credit score, as well as late fees or other financial inconveniences. 

Credit Mix (10%)

Credit bureaus also collect data on your different types of credit accounts. Having a healthy mix of accounts shows you are an experienced borrower, which may make lenders feel more comfortable with lending to you. To benefit the most from your credit mix, try to have more good debts over bad debts. Good debts are debts that come with other benefits besides providing money. For example, a student loan or auto loans are often considered good debts because they offer money as well as provide borrowers with an education (for student loans) or an automobile (for an auto loan).  

Credit Age (15%)

From the time you open your first credit account, you begin to establish a credit history. Borrowers typically like to work with borrowers with a longer credit history because it means they have more experience in the financial industry. 

Debt Compared to Income (30%)

How much a person owes in various debts compared to how much income they bring in regularly accounts for 30% of their credit score. To calculate your debt-to-income ratio, add up your current balances for your credit cards, student loans, car loans, mortgages, or any other loans you have. Next, add up how much money you bring in regularly. Calculate this amount by totaling up your yearly salary and other income you may have. Lastly, compare how much you owe with how much you bring in. This comparison is your debt-to-income ratio. 

Hard Credit Inquiries (10%)

How often you apply for new credit accounts matters. Whenever you apply for a loan or other financial product, lenders perform a hard credit check. A hard credit check is an official inquiry into your credit history. Your credit report records data on how many hard credit checks you acquire, so you want to keep them relatively low. The more hard credit checks on your credit file, the more your credit score may decline. 

Benefits of Credit Scores 

What’s the point of having a good credit score? Check out some of the awesome benefits below that can come with boosting your credit score! 

Higher Loan Amounts

Borrowers with a good credit score are more likely to receive approval on loans with high funding amounts. When credit scores are on the higher side, that means you have cultivated a credit history showing that you make payments on time and are likely to successfully pay off your loan. Lenders typically feel more comfortable lending higher loan amounts to these types of borrowers because there is a good chance they will make back their investment.  

Better Interest Rates

In addition to higher loan amounts, lenders usually extend lower interest rates to borrowers with optimal credit. When interest rates on a loan are lower, borrowers pay less overall during the course of their loan terms. 

Wider Variety of Financial Products

Borrowers with bad credit, unfortunately, have a limited option of financial products to choose from. Many lenders are wary of lending to borrowers with poor credit because it means they are a potential risk of paying late or defaulting. But when borrowers have excellent credit, most lenders are automatically willing to work with them. Therefore, higher credit scores give borrowers the advantage of picking from a variety of financial products when they need money. 

More Likely To Receive Perks From Lenders

People with higher credit scores also have a better chance of receiving perks from lenders and other financial institutions. For example, if you have a credit card, your credit card issuer may note and see that you have good credit and raise your credit limit. They may also send you offers for other cards or products they think you will receive approval for. 

How To Establish a Strong Credit History

Building credit and maintaining a positive credit history is vital to anyone looking to prioritize their financial health. Check out the helpful tips below on how you can establish a strong credit history and maintain it! 

Keep Your Credit Utilization Low

First, you want to try to keep your credit utilization ratio as low as possible. Typically, you want to keep your credit utilization ratio no higher than 30%. Your credit utilization refers to how much you have in available credit compared to your general income. Some factors that may be considered in your credit utilization are: 

  • How much money you are using on your current credit card limit. 
  • How much you are using on credit limits for other financial products. 
  • Your gross income. 
  • The amount you owe on bills or loans like a pay day loan
  • Funds in your savings account. 
  • Value of stocks or other investments. 

Check Your Credit Often

All borrowers are entitled to a free credit score report once a year. You can also check your unofficial report through most banks or credit card issuers. 

While you are only entitled to one free copy of your official credit report each year, you can perform soft credit checks as often as you like for credit monitoring purposes. A soft credit check is an unofficial credit report but reports on most of the same credit data that is included in your official credit reports. Checking your credit reports often gives you a real-time look at how your financial situation and spending habits affect your credit. If you see constant declines in your score, you may want to pinpoint the specific acts that are causing your score to go down and adjust your behaviors. 

Make On-time Payments

Lenders like to see that borrowers are using their credit responsibly and making payments on time. Since payment history is the most important factors that help determine your credit score, making all your payments on time is vital. To ensure you never miss a payment, you may want to sign up for autopay. With autopay, money will automatically be taken out of your account on the due date of any bill or expense you choose. You can even choose your automatic withdrawal day to be the day when you receive a paycheck to make sure you always have sufficient funds. 

Try a Credit Builder Loan or Secured Credit Account

If you have poor credit and are looking for ways to help boost your score, you may try a credit builder loan or a secured credit card. Secured accounts help people with less than ideal credit scores receive funding in a way that may help them improve credit.

Utilize Credit Reward Programs

You can also take advantage of credit reward programs to boost your score. For example, Experian Boost is a program that includes smaller bills, like phone bills or subscriptions, in your credit report. With a program like this, you can reap the rewards of making each and every payment on time, even for small expenses. 

Credit Reports and Scores | USAGov
What Does Your Credit Score Start At? – Experian