There’s a misconception that consumers start at the bottom of the credit ladder and move their way up. There can be truth to this, but often it’s more complicated than that. In fact, there is no one “starting credit score” people begin with and then move their way up from. Here’s how your initial credit score is determined.
What is a Credit Score?
A credit score is a three-digit number distilling your relationship with debt into an easily digestible metric. So if you never use credit or loans, you likely so not have a credit score. You’re what’s referred to as “unscorable.” That just means credit reporting bureaus don’t have enough information on your repayment history to reach a final judgment as to what your credit score ought to be.
Getting Your Starting Credit Score
Things become even more complicated when you learn that, even with a perfect payment history for the first six months of your credit report, you’re probably only going to have a credit score around 500. That’s because, even though the credit reporting bureaus now have enough information to score you, they still don’t have a lot of information to work with. What the credit reporting bureaus want to see is a longer credit history.
One way to help your credit score is to simply keep making on-time payments. That’s a critical action when it comes to your credit score.
Another is to diversify the types of credit you have. For example, if you only have one credit card, getting another or even getting a different type of credit service, such as an installment loan, shows that you are capable of handling different types of credit services responsibly.
Be careful, though — getting too much credit too soon can be a sign to potential lenders that you’re high risk.
Try to establish good behaviors immediately, which sets a strong foundation for you going forward.
Keep Your Outstanding Debt Low for a Solid Starting Credit Score
Another important component when it comes to your starting credit score is your credit utilization ratio. After paying your bills on time, lenders want to see that you are not using too much of your available credit. The less you can use of your credit (while still using your credit), the better. A Credit Karma survey showed that people who had a lower credit utilization ratio — in short, the amount of their available credit they were actually using — tended to have better credit scores.
When you’re just starting out in the world of credit, your best bet is to establish responsible credit habits such as timely payments and low utilization and your credit score will follow.