Are you wondering if you’re the only person who doesn’t have a credit score?
In reality, you are not alone. According to the Consumer Financial Protection Bureau, 11% of U.S. adults are credit invisible while another 11% have a thin or stale score file.
Whether you have a nonexistent credit history or a low score, it’s not too late. When it comes to building or rebuilding your credit score, everyone starts somewhere, and we can help you get a better understanding of how credit scores work.
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What is a credit score?
Your credit score reflects your creditworthiness, impacting whether potential lenders would lend money to you or not. This score is based on your credit history, which comes from the following five factors:
- 35% comes from your payment history. This component shows your ability to make timely payments – you will have a lower score if you miss a payment date and an even lower score for payments past due for more than 30 days.
- 15% comes from the length of your credit history. You will get a higher score if you have a long history. Having no credit history could hurt your score.
- 30% comes from your credit utilization. Credit use reflects the proportion of the money you owe versus the credit available to you. Maxed out credit cards and high loan balances could drag down your score.
- 10% is from your credit mix. Having a good mix of installment debt such as personal loans and home loans and revolving debt such as credit card debt yields a higher score for this component.
- 10% accounts for your recent credit activity. This score comes from inquiries from a new loan application and opening new accounts, which may temporarily decrease your credit score.
Credit bureaus may have their own scoring system, but most lenders use the FICO score developed by Fair, Isaac, and Company to evaluate a borrower’s ability to pay.
What credit score does everyone start with?
No one starts with a zero credit score, but it’s possible to have no credit score. Having a non-existent credit score could happen if:
- You have never used a traditional credit account such as credit cards and personal loans with a bank or financial institution that reports to credit bureaus.
- You are a recent immigrant. Credit scores from other countries will not count towards your U.S. credit score.
- You have no experience with credit because you are too young. This is one reason why most 18 to 19-year-olds have no credit score.
- You have not used credit for the past two years.
Is a credit score important?
Yes. Lenders will consider your credit score when they are evaluating your loan application.
Having a good credit score is necessary to access loans with better terms and more affordable interest rates. Getting lower rates, even by just one percentage point, could save you thousands of dollars.
Credit scores could also affect the price of your insurance premiums and even your ability to rent out a property.
What is the lowest possible credit score?
FICO scores range from 300 to 850. If you see a dip in your credit score and you’re wondering how low it could go, the lowest possible score is 300. However, keep in mind that any score below 650 is considered problematic. On the other hand, those who score at least 750 can take advantage of better interest terms and rates.
Typically, lenders will only lend money to borrowers with a credit score of around 700. If your score is hovering in the problematic range and you’re struggling to bring it back up, consider using a credit builder loan.
MoneyLion, for instance, has a membership program that entitles members to take advantage of a credit builder loan with no hard credit pull needed. This loan could enhance a member’s credit score by up to 60 points within 60 days.
Monitor your credit for progress
Monitoring your credit score is always a must whether you’re concerned about unusual activities in your account or when you’re trying to work towards a better credit rating.
You can get a free credit report from each credit bureau every 12 months, but you can also track and monitor your progress 24/7 using products like RoarMoney.
Don’t forget to check the details in your credit report and dispute errors if necessary. If your credit report lacks financial information, consider linking your rent payments to Rent Track or using Experian Boost so rent and utility payments would be considered in your FICO score.
How to establish first time credit
Here are some things you can do to build credit:
- Apply for a secured credit card. Since a deposit backs these cards, your application would be approved automatically as long as you meet the requirements.
- Take advantage of student credit cards. Some banks offer credit cards to teens and to college students with good standing, but they can have high-interest rates if you don’t pay on time.
- Become an authorized user of your parent’s credit card. But be sure to check how the credit card issuer reports the credit history for authorized users to see if it could help you build credit.
- Get an installment loan with a co-signer. Lenders would be more willing to approve a loan even if you don’t have a credit score when you have a cosigner with a good credit score.
- Use credit builder loans.
Building credit improves your financial ealth
Building credit and having a good credit score is necessary to take advantage of more opportunities. There’s always room for improvement, whether you have a low score or no score at all. However, you need to start the habit of making better financial decisions and controlling your debt.
While credit building is important, don’t forget other components of your financial health such as saving and planning. Kickstart your journey towards better financial health even with small investments. MoneyLion’s fully managed investment accounts allow you to start investing with no minimums for only $1/month.