When you start using financial products like loans and credit cards, banks start monitoring your credit profile and assign a score accordingly. The score corresponds with your borrowing and repayment habits, painting a picture of your reliability as a borrower.
Whether you’re an adult about to begin your own credit journey or are a parent looking to help your child get a head start on building credit, you should get familiar with the basics first. The first step is understanding what your score starts at.
This guide will clear up some common misconceptions about credit scoring and answer the most pressing questions:
- What does your credit score start at?
- How is your credit score calculated?
- How can you start establishing a solid credit profile?
Does Your Credit Score Start at 0?
It’s natural to assume every person starts with a credit score of zero and works their way up. As sensible as it may sound, this isn’t how scoring works. When you first start building a credit profile, you don’t have any credit score.
This is because your score is determined by your credit history, which starts the moment you take out any form of credit (loans, credit cards, etc.). Your credit usage and repayments are reported to the credit bureau, and this information is used to calculate your first score. You can get a FICO Score within six months of opening a credit account, and your initial score will depend on your borrowing and repayment behavior.
With this in mind, there is no universal starting score—everyone starts with a different one. This begs another important question—what determines your starting score?
Source: Kelly Sikkema
How Is Your Starting Credit Score Calculated?
Your initial score is calculated the same way as it will be going forward—based on the specific factors encompassed by the scoring model. The most popular models are:
- FICO® score
Both VantageScore and FICO scores start at 300, but this won’t be your starting point unless you have extremely poor spending habits. Your first credit score will likely fluctuate between below 500 to over 700 as it changes with your credit behavior.
FICO is the most popular credit score among lenders and uses five factors with assigned percentage values based on the impact on your score. There are many different versions of this scoring model, but FICO Score 8 is the most commonly used and relies on the following factor weights:
|FICO Score 8 Credit Factor||Credit Score Impact|
|Credit history length||15%|
VantageScore—Versions 3.0 and 4.0
VantageScore—the second most popular model—doesn’t assign fixed values to the determining factors. It uses six aspects of your credit behavior, categorized by the level of influence on the score.
How your VantageScore is calculated depends on the version you’re using. VantageScore 3.0 is the best-known version of this model—consult the table below to see the factors that make up your score according to it:
|Factor||Factor Weight||Influence Level|
|Payment history||40%||Extremely influential|
|Depth of credit||21%||Highly influential|
|Credit utilization||20%||Highly influential|
|Recent credit||5%||Less influential|
|Available credit||3%||Less influential|
In 2017, the credit bureaus released VantageScore 4.0—a new model that considers your credit reports in a slightly different way:
|Factor||Factor Weight||Influence Level|
|Payment history||41%||Extremely influential|
|Depth of credit||20%||Highly influential|
|Credit utilization||20%||Highly influential|
|Recent credit||11%||Moderately influential|
|Available credit||2%||Less influential|
VantageScore Factors Explained
To give you a better understanding of the factors that influence your VantageScore, here’s what they all mean:
- Payment history—Late payments hurt your score. This factor looks at whether you’re paying your bills on time, but also it inspects how recently you made a late payment. Keep in mind that late payments stay on your credit record for 7 years
- Depth of credit—This category looks into the age of your accounts—youngest, average, and oldest. The oldest account gives lenders a longer-term insight into your borrowing and repayment habits, helping them make a more informed decision about lending you the money
- Credit utilization—This shows how much credit you use and how much you have access to it. Your credit utilization ratio is the relationship between the amount you charge to your credit cards (monthly) and your total credit limit. Aim to keep your credit utilization ratio below 30% as high ratios show a heavy reliance on credit
- Recent credit—This factor looks into the number of recently opened accounts as well as the number of hard inquiries showing on the report. Lenders consider opening several accounts in a short period of time a red flag as it indicates a heavy reliance on credit or a potential change in fortune, making you less suitable for credit
- Balances—This category considers the total balances on all your credit accounts (current and delinquent). While high balances can hurt your credit score, the effect they have is not drastic
- Available credit—The factor looks into how much credit you have available on your revolving accounts. While it doesn’t affect your credit score that much, larger amounts can still raise it slightly
Tips for Maximizing Your Initial Credit Score
People usually don’t think about their credit score until it’s time for a substantial purchase, like a house or a car. This is not advisable as those types of purchases require an excellent credit score, and establishing one doesn’t happen overnight.
Instead of making this mistake, you should complete the following steps from the moment you start using credit to secure a good starting score:
- Don’t make late payments or miss payments
- Mind your utilization rate
- Limit new credit applications
Make Timely Payments
As you saw in the breakdown of credit-scoring models, payment history is the most important determinant of your score. You should prioritize loan repayments to avoid getting flagged as an unreliable borrower by the bureau.
While you don’t have to make payments on the same date each month, make sure not to miss them by over 29 days. Any payments made 30 or more days after the due date are reported to the credit bureau and marked as a red flag, lowering your score.
The easiest way to stay on track is to set up automatic payments. The only thing you must ensure is that you have sufficient funds on the set date to avoid account overdrafts.
Keep Revolving Credit Usage to a Minimum
If you use revolving credit, you should be careful about your utilization rate—the ratio between the amount of credit used and the total amount of available credit.
Your utilization rate shouldn’t exceed 30% and ideally should be between 2% and 9% to optimize your credit score. This shows the lender that you are financially secure and not dependent on using all of your available credit to make purchases. As a result, your credit score should be higher.
There are two ways to keep the rate low:
- Minimize spending
- Ask the lender to increase your limit
The first method is preferred as it indicates greater financial responsibility, so only go with the second option if necessary.
Don’t Apply for New Credit Unless You Need It
Even though credit inquiries aren’t a major factor in determining your credit score, you shouldn’t open new accounts unless you have a specific need that you can’t fund from other sources.
While reviewing credit terms on a website or researching a prequalified offer isn’t reported as a hard inquiry, any formal application for credit can be reported as a hard inquiry on your credit profile. Multiple hard inquiries in a short time period can lower your credit score because it appears to lenders that you are financially distressed.
Note that rate shopping—particularly for large loans like mortgages—is an exception and usually isn’t registered as more than one hard inquiry when completed in a short time period. The same goes for car loans, so assessing these credit types with the lender shouldn’t hurt your score.
How To Check if You Have a Good First Credit Score
If you follow the steps above, your starting score should be a solid foundation for a strong credit profile. There are several ways to check if this is the case:
- Use online services—You can check your credit score on numerous websites, but make sure to only work with authorized providers
- Ask your lender—Your bank or loan officer can get your credit score from the bureau upon request
- Reach out to the bureau—You can get a credit report every year for free directly from the bureau (Equifax, Experian, or TransUnion), but it won’t include your credit score. You should check the report from each bureau to make sure your credit profile data is accurate
Note that credit scores are only calculated for adults since credit reporting isn’t done for minors. People under the age of 18 also typically don’t have access to the financial products necessary for building a credit history. The only exception is adding a child as an authorized user of an adult’s credit card.
This is a strategy many parents use to help their kids build credit early in life. While it can be beneficial, this method suffers from several major disadvantages:
- The child inherits the adult’s score, which may be a problem if the adult doesn’t have good spending habits
- The credit card issuer must support this arrangement and report it to the credit bureau
- The child still doesn’t establish their own credit profile but relies on the parent’s credit. When the child is removed as a user, the parent’s credit history is permanently deleted from the child’s credit profile, meaning they’re back to square one
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Another way a credit score could show up on a minor’s report is a situation nobody wants to find themselves in—identity theft. This has become a major concern in recent years, so let’s explore it more thoroughly.
Why Minors Are at Risk of Identity Theft
Unlike adults, minors aren’t subject to extensive identity monitoring. This leaves them vulnerable to synthetic identity theft—a form of fraud where the perpetrator combines fake and real personal information to forge a new identity.
According to the Federal Reserve’s paper, this type of theft is more dangerous than traditional identity fraud involving impersonation because it’s more difficult to detect.
“It is often difficult to differentiate synthetic identity payments fraud from traditional identity payments fraud and legitimate financial activities. As a result, subject matter experts indicate that the number and volume of synthetic identities in financial portfolios are underestimated. For example, ID Analytics estimates that 85 percent to 95 percent of applicants who were identified as synthetic identities were not flagged as high risk by traditional fraud models, such as those used to detect traditional identity theft.”
Javelin’s research shows that one in 50 minors and young adults are victims of identity theft. Those born after 2011 are particularly vulnerable because their Social Security numbers are randomized as opposed to being tied to birthdate and location.
To protect vulnerable age groups from identity theft as much as possible and help them build credit without complications or extensive risk, Austin Capital Bank created FreeKick.
How Does FreeKick Help With Credit Building and Monitoring?
FreeKick combines a Federal Deposit Insurance Corporation (FDIC)-insured deposit account with additional services to fulfill two important purposes:
- Helping minors and young adults establish and build a strong credit profile
- Monitoring for and detecting identity theft through credit profile monitoring
Set-It-and-Forget-It Credit Building
If you’re a parent looking to help your child build a strong credit profile and give them a financial head start, FreeKick enables this through a simple process:
- Go to FreeKick’s website and choose from three plans based on your deposit amount:
- Free—one-time FDIC-insured deposit of $2,500
- $49/year—one-time FDIC-insured deposit of $1,750
- $99/year—one-time FDIC-insured deposit of $1,000
- Transfer funds for the deposit and fee if applicable
- Have your child ‘activate’ their account
That’s it. When your account is activated, FreeKick opens a 12-month no-interest loan that is paid using the funds in your deposit account, and your child will automatically start building credit. Every twelve months, you can decide if you want to keep building credit for your child and protecting their credit profile, or you can get 100% of your deposit transferred back to you. When you close the account, credit building and credit profile monitoring for your child cease.
If the child is of legal age, loan payments alongside the amount and date will be reported to the credit bureau monthly. If they’re a minor, credit reporting will be activated when they become a legal adult.
Note that while there is no penalty for closing the account early, if you close it before your child becomes an adult, no credit history will be reported because the three major credit bureaus do not accept credit reporting for minors.
The entire process happens automatically when you sign up, so there are no ongoing actions required on your part.
Advanced Credit Monitoring for Minors and Young Adults
Identity theft is an elaborate crime, so protecting your child from it involves the use of advanced monitoring tools typically unavailable to the general public.
Once you open a FreeKick account, your child’s credit profile will start being monitored, decreasing the chances of becoming subjected to undetected fraudulent activities.
Safeguard your child’s credit profile and help them build their credit for an easier future by signing up for FreeKick.
Featured image source: PabitraKaity