As is the case when you are 18 years old and have never applied for credit, you wake up with no credit score. Credit scores are numerical values – ranging from 300 to 850 – that reflect your credit report and credit history. Since they are new, the credit bureaus have no history on which they can base the score for you.
This implies that one starts from an inferior position and has to progress through a credit gradient over time by exercising due diligence. Here’s a breakdown of what constitutes no credit and how one can progress toward establishing a good credit rating.
The concept of ‘tabula rasa’ may be new to you, but it is one that you can easily familiarize yourself with and understand in this passage.
This status makes you a candidate for a thin file –which means that there is not much information at the three major credit reference agencies, which include Experian, Equifax, and TransUnion. These companies depend on creditors to report your credit activity so that information can be compiled. You are said to have a thin or blank file until the accounts start reporting your credit use.
If you requested your credit reports at this stage, you would likely receive documents with minimal information or may show that lenders had requested your credit reports. Since you do not have credit accounts or records of payments, you do not have FICO or VantageScore initially.
Opening Your First Account
Establishing credit starts with a single account. Most individuals will open their first account in the form of a credit card. Credit cards provide flexibility in establishing credit since one can transact with a minimum credit limit or gradually increase it. Applying for a credit card involves completing an application form and providing information that the bank will use to check your creditworthiness.
A good example is that you might have to begin with a secured credit card in which case you pay a refundable sum that serves as your credit limit and security deposit for the bank. Once you pay your bills on or before the due date for several months, you can upgrade to an unsecured card, and your deposit will be refunded.
If credit cards appear to be too complicated, you can apply for a store credit card affiliated with a particular store. The major disadvantage of store cards is that they have relatively low credit limits and high annual percentage rates but it is easy for people to begin using credit, and to establish a good record of payment.
Building Your Credit History
The first credit card or store charge card creates the basis of your credit history. Thus, by maintaining a low balance on the credit card and making the monthly payments on time, the holder of the card demonstrates his or her creditworthiness as a borrower.
It is a good idea to show that you can handle this first line of credit even if it is in charging a small amount for purchases. Over the years, you will have a record of on-time payments, a utilization ratio below 30 percent, and no penalties resulting in things like late payments, accounts in collections, and high-limit usage.
During this time, the credit reports are from scratch changed to active records showing that you are capable of managing the credit for months or years. Credit scoring models such as FICO are used to assess this information with credit bureaus to compute the credit score you are given.
Key Score Factors
The FICO scoring method is one of the most common models used by lenders. As you build your history, FICO analyzes factors in five main categories: As you build your history, FICO analyzes factors in five main categories:
• Credit history – past performance on timely payments • Credit card balances and loans – how much is owed vs the credit limit • Credit history length – the length for which the accounts have been opened • New credit – the number of accounts that have been opened recently • Credit utilization – credit cards, retail accounts and installment loans.
The importance of these categories depends on the specific type of FICO Score, but payment history and amounts owed usually have the biggest impact. Discharging card balances below 30 percent of the credit limit will significantly contribute towards attaining a 700 plus credit score.
Reaching Credit Milestones
While practicing good credit habits, credit reports will depict a stream of positive activity of financial responsibility. Here is a look at common scoring milestones: Here is a look at common scoring milestones:
No Score – No credit history 300 to 499 – indicates poor credit management 500-599 – Subprime borrower area 600-699-credit scores that are near good credit scores
700 to 749 – This is a good credit level for affordable interest rates. 700 to 749 – Good score with standard rates preference 600 to 699 – Average score with mid-range rates preference 500 to 599 – Low score with high rates preference 300 to 499 – Very low score with lower mid-range rates preference 200 to 299 – Very poor score with high rates preference 100 to 199 – Very poor score with high rates preference 0 to 99 – Very poor score with high 760 to 800 – Near-prime credit rating indicating responsible behavior in the past eight years
A credit-worthy customer enjoys the best credit terms which include favorable auto loan rates and the availability of 0 percent credit card financing offers from credit card companies. But such a strong score takes time to build – at least a few years on average.
It needs to be noted that scoring models do take into account, the natural growth of your profile. The fact is that people with 30 accounts will most likely beat a credit novice, but as long as one avoids defaults and pays his bills every month, he will do fine for the first year or two.
Improving Your Starting Position
Even though it is normal for a beginner to make some mistakes such as missing a payment or charging their first few cards to the limit, such actions set up roots of credit harm that hinder your score. Of course, having learned how to manage new financial products, some mistakes are inevitable.
If you did make early stumbles, the good news is that it is not the end of the world. Here are moves to make up ground: Here are moves to make up ground:
• Pay off all current accounts and keep them at zero balances. • Decrease credit card balances and other forms of revolving credit. • Request lenders to unfreeze the credit reports that contain the late payment entries. • Do not cancel the credit cards that are not being used as that reduces the length of credit history. • The number of times one applies for credit is important in determining their credit score and therefore, new credit applications should be limited. • On-time payments and low card usage create a positive payment history.
If the credit score is low at the beginning, but a consumer maintains constructive credit practices, uses new credit moderately, and pays the credit on time, his score will improve over time. The scores appreciate responsible behaviors that depict managing of credit well.
The Building Blocks Perspective
If you want to consider the credit scores as a sport then it would be more like the track-and-field event. This implies that basic entry levels depend on the inborn prowess of each runner. Some start the race with great energy; others have a bad start to the race. However, those who maintain the prescribed pace throughout always stand a chance to complete their race no matter the pace they start with.
Likewise, responsible financial activities such as paying monthly bills and maintaining low credit card balances enable one to establish a credit score within a short duration. Sustaining these positive habits is the equivalent of running the course correctly across the period.
Therefore, while people are at different starting points, the ability to show credit management and usage over some time will help one end up with full access to credit and better interest rates. Whoever your baseline credit status may be, the right habits indeed point to a better credit future in the long run.
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