What credit score do you start with?

How old were you when you got your first credit card? How about your first auto loan? For some people, the answer to that question may be difficult to answer. You may know people who make a point of paying for everything upfront and never using credit. That works for a while, until the time comes to make a major purchase. If you do not have a history of using credit, you may find it more difficult to get a mortgage. Similarly, if you try to take out a loan for a new business, you may find it challenging. Without credit, even renting a property from a property management company may prove difficult.

Anyone who has no history with credit, starts off with no credit score. Since there’s nothing in his or her credit file, there’s no way to calculate a score. To take a step back, let’s address how your credit file, or credit report, is compiled. In the United States, we have three major credit reporting bureaus: TransUnion, Experian, and Equifax. These credit monitoring agencies work with different financial institutions to compile a report about every person’s credit history. Using your name and social security number, these major credit bureaus list all of your accounts and your payment history, along with other information culled from public records and creditors. When people talk about a “credit score,” they’re actually referring to a number of different possible scores, all calculated from the information that’s been gathered in these reports.

If you want to know what information has been compiled about you, all American consumers have the right to check their three credit reports (one from each of the three credit bureaus) once a year. You can get your free credit reports at AnnualCreditReport.com. Now, using the information in these reports, a number of companies calculate credit scores, designed to inform lenders, creditors, and other financial institutions about the creditworthiness of individual consumers. While different types of credit scores exist, for the sake of simplicity, let’s focus on how the VantageScore works. Like most other scores, VantageScore operates on a scale from 300 to 850.

VantageScore 3.0, a commonly used version of the VantageScore credit scoring model, uses the following credit score ranges:

300-499 | Very Poor Credit
500-600 | Poor Credit
601-660 | Fair Credit
661-780 | Good Credit
781-850 | Excellent Credit

When a person hasn’t opened any credit accounts, nothing’s been reported by TransUnion, Experian, and Equifax. Therefore, no matter what credit scoring model is used, it’s impossible to rank that person. Without a history of credit, you don’t just have a low score, you have no credit score at all.

Getting Your First Score

If you open a new credit card, TransUnion, Experian, and Equifax begin tracking information about that account right away, from the first statement. The same is true of an auto loan, a student loan, a line of credit, or any other type of credit account. The VantageScore scoring model only requires one month of reporting in order to calculate an initial score. Other models take up to six months or longer. That’s why VantageScore is able to provide a score for 98% of consumers with a credit file. VantageScore launched in 2006, developed in partnership with all three credit monitoring agencies. Part of the reason why VantageScore assigns a score so quickly has to do with their use of predictive modeling and their inclusion of rent, telecom, and utility data.

While it’s possible to get a score quickly, it’s hard for consumers to receive a perfect score if they’re new to credit. Because of penalties for new credit and for young credit age, people who are new to credit tend to have lower scores than those with long-established credit. This is reflected in the demographic data. Most calculations of credit score by age group show a correlation between age and credit score.

Gneration Average VantageScore
Gen Z 634
Gen Y 638
Gen X 658
Baby Boomers 703
Silent Generation 729

Source: https://www.experian.com/blogs/ask-experian/state-of-credit/

In other words, for the youngest group, Generation Z, the average VantageScore only qualifies as fair. Still, it’s important to understand that a fair credit score is still better than no score at all. With a score of 634, you can still qualify for credit, even if you’ll be receiving less favorable terms. For instance, if you’re applying for a car loan, you might qualify for a lower loan amount, or receive a higher interest rate with larger monthly payments. On the other hand, if you had no credit score, the bank or auto financing company would have no way to compute your score. Without a credit score, you’d likely receive no financing at all.

A Perfect Score Takes Time

Although each credit bureau calculates your score using a different credit report with slight variations in data, they'll all compute your VantageScore using the same formula.

Here's the breakdown of how VantageScore 3.0 is calculated:

Payment History | 40%
Depth of Credit | 21%
Credit Utilization | 20%
Balances | 11%
Recent Credit | 5%
Available Credit | 3%

Two of the factors listed above penalize consumers who have "thin" credit files, without much available information. Because of these penalties, you might start off with bad credit, but your score may improve as you continue building credit over time.

First of all, depth of credit counts for 21% of your total score. There are two components to depth of credit: credit age and credit mix. Credit age is the amount of time that your accounts have been open, also known as the length of your credit history. Obviously, if all of your credit accounts are brand new accounts, you will not be able to attain a high score in this category.

Your score also benefits from having a healthy mix of different types of credit, including installment loans and revolving credit. Revolving credit typically involves credit cards or home equity lines of credit with a fixed credit limit. Rather than pay off the total each month, your remaining balance "revolves" into the next month. Your payments vary, depending on how much of the credit limit you've spent. On the other hand, installment loans involve fixed monthly payments over the course of a fixed schedule, until the loan is paid in full. Examples of installment loans include student loans, car loans, mortgage loans, etc. Now, there's a bit of a catch-22 here. You're rewarded for a healthy mix of different types of credit, but you're also penalized for recent credit. So, if you're looking to build credit, you might imagine that you should open a large number of installment andrevolving credit accounts; however, doing this would not raise your credit score in the short term. In fact, because most scoring models penalize you for opening new accounts and for hard inquiries, trying to open many new accounts at one time may cause your score to lower.

Hard Inquiries and New Accounts

When a potential lender sees a large number of new accounts and hard credit inquiries, they're likely to think that you're a credit risk. Seeing someone who is new to credit opening a large number of new accounts can raise red flags. A bank may not want to extend a personal loan or a line of credit to someone who is likely to owe other creditors in the near future. Hard inquiries put financial institutions on notice that you may owe quite a bit in the near future.

Unlike soft inquiries, such as pre-approved offers or employee background checks, which do not impact your credit report or credit score, hard inquiries happen when a lender makes an authorized request to one of the credit reporting agencies to check your financial history. A hard inquiry might happen when you apply for a loan, apply to rent an apartment, or apply for a credit card. Hard inquiries stay on your credit report for two years after the initial credit check. A hard inquiry impacts your credit score for one year. If you're someone with marginal credit, like a person who's opening credit accounts for the first time, the small number of points you may lose from a hard inquiry could make a big difference to your application. With VantageScore, the recent credit factor counts for 5% of your total score. Both hard inquiries and new accounts, which you're bound to have, will drive your score down.

The Benefit of Starting Early

Because establishing credit takes time, it can be important to open credit accounts before you face a pressing need. For example, it's much less significant to have a low starting credit score if you do not intend to borrow money in the immediate future, than it would be if you need credit tomorrow. If a person sets up accounts and avoids late payments, he or she will build payment history and depth of credit factors, the two most influential components of a credit score, over time. Even if a person begins with an average starting credit score, within a few years time, he or she will be able to build a "thicker" credit file, full of on-time payments and long-term accounts. That's how you establish healthy credit habits.

If you don't have any time to waste and you need to find a way to become eligible for credit quickly, you should consider finding a co-signer. By finding someone with good credit who is willing to take responsibility for your loan or credit card, you may be able to get an offer that would otherwise be out of reach. If your co-signer has an excellent credit score, you may even qualify for the best credit card interest rates or favorable terms on your mortgage repayment plan. Of course, a co-signer puts their own credit at risk by vouching for you. When a person co-signs on your loan or you become an authorized user on his or her credit card, your personal finances become tied together and that person shares full responsibility for your actions.

If you're not able to find a co-signer, you have no choice but to be patient. Building good credit health takes time. Luckily, with VantageScore, you'll be able to see your credit score fast⁠—sometimes within a month of opening a new credit account. While improving your depth of credit and recent credit factors will take time, it can be helpful to get started soon, within reason! You can begin by checking to see whether you already have a credit score.