This score is one of the most important indicators for banks, insurers, landlords, and even employers. Young Americans should be aware of how these calculations work, as their result affects so many spheres of life. Citizens may not have a borrowing history until they turn 18. So, what is the starting point, and how can you improve your status?
What Scores Look Like
If you expect to get a specific score automatically, you will be disappointed. Until you start using lending services, you have no records at all. Moreover, borrowers need at least 6 months of history for anything to be reported to the bureaus. Both popular evaluation systems — FICO and VantageScore — have a scale from 300 to 850, so you begin at the lower end of the spectrum.
Every bureau — reporting agency — has its own understanding of the breakdown. For example, the first category (“Poor score”) includes consumers with scores between 280 and 559 for Experian, 300-550 for Equifax, and 300-499 for TransUnion. Note that the scores are not always fair — check the Credit People review for details.
The other categories are Fair, Good, Very Good, and Excellent. You need at least 760, 750, or 781 points for the latter, depending on the bureau. As you can see, the values are not very different. Still, any citizen benefits from a higher score, which is why credit repair is so popular. So, where do you start — at 0 or 300? Neither.
Your Starting Point
Calculations are based on the consumer’s borrowing history. If you have no records, there is nothing to assess. For the first report to be generated, you need to have had an account for at least 6 months. Despite common misconceptions, you are not assigned any figure automatically.
After you take out a loan or card and use it for half a year, the score is finally assigned. This may be anything, from under 500 to over 700. The result depends on how well you have handled your financial obligations.
The age of history also determines the total. On the upside, this factor is less important than some others — it only constitutes around 15% of the result. In comparison, the history of payments defines 35% and 40% of it, depending on whether FICO or VantageScore is applied. Thus, even if your history has only started, you can still get a score of 600+.
Keys to a Positive History
Knowing the components of score assessment, you can deduce the strategies for the best results. There is no way to affect the age of records except borrowing and waiting. At the same time, you can keep the other elements in check. They define the most consequential financial habits. The following percentages are given for FICO, but the logic of VantageScore is very similar.
Being late with payments is the most serious mistake. These events affect the largest chunk of the evaluation (35%). Set reminders so you never miss the due date. If you still forget, the lender may not report the delay if it is less than 30 days. Correct your mistake as soon as possible and contact the institution to confirm this. Note that you will have to pay a penalty anyway.
The proportion between the size of available credit and the amount charged is known as credit utilization, and it applies to your credit cards collectively. Experts recommend using no more than 10% of the limit. The indicator affects 30% of the score. If you make a large purchase, try to pay off the debt as soon as possible.
This term refers to the use of different products. As you get older, you will gain experience with credit cards, consumer loans, auto loans, mortgages, etc. The importance of diversification is relatively slight — it only influences 10% of the calculation.
When you apply for any credit product, the institution checks your background by retrieving the report. This leaves a hard inquiry on it. There is nothing wrong with requesting new loans, but you should space out your attempts.
On the one hand, multiple inquiries for the same type of service, such as a mortgage, are treated collectively as a single entry. On the other hand, if you request different types of lending within a short period, this is bad for your score. Lenders can also see this, so you come across as someone desperate for cash. This factor influences another 10% of the total.
How to Check the Reports
By law, every citizen of the United States has a right to collect their reports from all nationwide bureaus for free once a year. Now, until April 2022 this service is provided every week. Go to www.annualcreditreport.com and submit your request (you will be asked for basic personal details). You can download all three files at once — from Experian, Equifax and TransUnion.
If Your History Is Too Short
This may prevent you from collecting the reports or getting a loan. There is nothing terrible about insufficiency — it simply means that you have not been a borrower long enough to meet the requirements. Here are four things you could do.
The Bottom Line
When consumers turn 18, they do not get a specific score by default. It requires a history, so there is nothing to assess until you start borrowing and make payments for at least 6 months. This is when the score will be determined, and your age should not prevent you from getting over 600 points. Be careful with your spending, make payments on time, and do not apply for multiple loans unless you really need to.
WRITTEN BYBrand Voices