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Start Smart: A Beginner’s Guide to Understanding Your Starting Credit Score

It’s important to understand the fundamentals of credit, including your starting credit score. Here’s what to expect when you begin establishing a credit history.

Author: Arro Team

December 27, 2022|Blog

Start Smart: A Beginner’s Guide to Understanding Your Starting Credit Score hero image

If you're new to the world of credit, you might be wondering what your starting credit score is. As you begin your financial journey, knowing where you stand and how to build and maintain a healthy credit score is important. Plus, establishing good financial habits early will help you get off on the right foot.

In this article, we'll take a look at how your starting credit score is determined and how it impacts your financial future. Let's dive in.

What Is a Credit Score? 

Your credit score is a three-digit number that reflects your creditworthiness. Your score ranges from 300-850 and is calculated using information in your credit file. 

Three major credit bureaus track and compile your credit information: Experian, TransUnion, and Equifax. Each bureau uses its own scoring model, so your score can vary slightly depending on which company you or a potential lender use. 

Lenders use your credit score to determine if they'll grant you a loan, and if so, what interest rate they'll offer and how much they'll lend to you. Your credit score is fluid, so it changes over time based on how well you manage your finances and pay your debts. 

What Is a Starting Credit Score? 

Your starting credit score is the number assigned to you when you first apply for credit. If you've never had any type of loan or credit card before, then you don't actually have a credit score yet because there isn't enough data associated with you to calculate one. 

But don't worry — you don't start at 0. 

Even though the lowest score is 300, surprisingly, that's not where most people begin. You're also not likely to start at the top score of 800+ either. Instead, your first credit score will most likely fall somewhere in the middle

The lower scores are typically assigned to consumers who have negative marks on their credit report, such as late payments, accounts in collections, charged-off credit accounts, or repossessed vehicle loans.

So, when you start establishing credit, you control which direction your score goes with how you handle your personal finances. 

We'll give you a hint — you want it to go up by being responsible with your finances.

When Does Your Credit Score Start?

Do you think you automatically get a credit score on your 18th birthday? Nope, it doesn't work that way. 

Your score isn't calculated until your credit report is pulled for the first time. That's when the credit bureau compiles your information and generates your first credit report and score. 

What Factors Contribute to Your Credit Score?

Knowing what information is involved in calculating your credit score is essential. That way, you can take the right actions to help your finances. 

Payment History

Your payment history is a record of the way you've made payments on your loans and credit cards. Making on-time payments is crucial, not just to avoid late fees but to avoid late payments being reported on your credit report. Just one late payment can haunt you for seven years! That’s the amount of time it can stay on your credit report.

Types of Credit You Have

It's a good idea to have a credit mix of different types of loans, like installment and revolving. Examples of installment loans are auto loans, student loans, and personal loans. Revolving loans are lines of credit and credit cards.

Length of Time You’ve Had Credit

The length of your credit history is simply how long you've had loans in your credit file. So if you're 25 and your first loan was a car loan when you were 20, you've got five years of credit history.

Amounts Owed 

This is the total amount of debt (installment loans and revolving lines of credit) you owe to lenders. That amount is broken down even further to see how much of your available credit you're using compared to your credit limits. This is known as your credit utilization ratio, and if you want to have an optimal credit score, it’s best to keep it under 30%. In other words — don't max out your credit cards.

New Credit 

Each time you apply for a loan, the lender pulls your credit report. This is called a credit inquiry, and your credit score can take a hit for each inquiry, unless they’re all within a short time period. For example, you can shop around for a car loan and let multiple lenders review your credit so you can compare rates. Just be sure to keep these as close together as possible (typically 14 to 45 days) so they don’t count as separate inquiries. The impact on your score is the same whether you're denied the loan, approved and accept the loan, or approved and decide not to take the loan.

How to Build Your Credit Score When You Don't Have Any Credit

Wait, so you need credit to be approved for a loan. But, you also need a loan to build credit — so what are you supposed to do?

Even though you may not have any credit to your name yet, that doesn't mean you don't have options.  

Starter Credit Cards

Many banks offer starter credit cards specifically designed for consumers with little-to-no credit experience. These cards usually have low limits, but they help you generate a payment history needed to grow your credit score.

Secured Loans

This is a loan that requires you to put up collateral in order to be approved. Collateral can be a car, a home, or a savings account. Lenders reduce their risk with secured loans because if the borrower fails to pay it back, the lender can keep the collateral.

Secured Credit Cards

Secured cards work just like unsecured cards, except your credit line is based on how much money you put up as collateral (security deposit). You can eventually apply to have your card switched to an unsecured card after you've shown you can accumulate a credit balance and pay it back, month after month. Like we said, it’s all about good habits!

Being Added as an Authorized User 

You can be added to a family member's credit card as an authorized user, which helps you establish credit. You can use the card as if it were your own, but the primary cardholder is the one required to make the payments — not you. Just keep in mind that if they fail to pay, it will hurt your credit score too.

Student Loans

Federal student loans don’t require a credit check, so your score doesn't come into play. But, paying your loans does help you build credit because your activity is reported to all three credit bureaus. 

Having a Co-Signer

When you're first starting out on your credit journey, you may need a co-signer on your first loan or two. This can help you qualify for unsecured loans, get lower interest rates, and avoid security deposits. If you, as the borrower, are unable to make payments, the co-signer is held responsible for paying the loan. 

What Is a Good Credit Score?

Well, that depends. Two credit companies use their own credit scoring model: VantageScore and FICO Score. 

They each use their own calculations, but the resulting scores are pretty similar. The score lenders most commonly use is your FICO Score. The ranges are:

  • Poor: <580

  • Fair: 580-669

  • Good: 670-739

  • Very Good: 740-799

  • Excellent: 800+

Vantage has its own credit score ranges:

  • Very Poor: 300-499

  • Poor: 500-600

  • Fair: 601-660

  • Good: 661-780

  • Excellent: 781-850

Why Does Having a Good Credit Score Matter?

A good credit score can save you money and open doors to opportunities you may not qualify for if you have poor or bad credit: 

  • Lower interest rates on loans 

  • Higher credit limits

  • Lower insurance premiums 

  • Job opportunities

Ways to Build a Good Credit Score

How do you achieve a good credit score? Building credit takes work and patience on your part. Once you’ve established a starting credit score, working towards improving it over time is key. 

Here are some tips for building a good credit score rating: 

  • Make your loan payments on time. Late payments hurt your credit score — so keep up with all due dates. 

  • Don't overextend yourself. If you have one or a few credit cards, don't max them out because that damages your credit score. 

  • Take it easy when you first start establishing new credit. Don't get tempted by every department store offering discounts if you apply for their credit card. Why? Because each time you apply for a loan, the lender pulls your credit report. They do a hard inquiry, which can bring your credit score down each time it's pulled.

  • Keep an eye on your credit report. Once you've built some credit, you should check your credit report at least once a year. Not only can errors occur, but reviewing your report can also help you discover identity theft if you see open loans that you didn't apply for. Dovly is a credit restoration engine that can find and track these issues, then automatically dispute them for you.

  • Use a service like Experian Boost. It helps raise your credit score by counting payments made from your bank account or credit cards, such as rent and utilities, to build your credit score.

Focus on Building Your Credit Score Now That You Know Where You Start

Knowing your starting credit score is an important early step in your financial journey. Then you can use the factors that impact your credit score to focus on improving it over time — especially by always making on-time payments and not exceeding your credit limits. 

At Arro, we help you establish and build credit with our Arro Card. All you need is your ID number (SSN or ITIN) and a checking account to see if you qualify, making it a great option if you want to increase your starting credit score.