The credit world can be quite confusing and intimidating if you are just getting started. If this is the first time that you will build credit, chances are you are wondering what credit scores mean, how these are calculated, and what a good and bad credit score is.
Does everyone start off with perfect scores, bad scores, or with no score in the first place? How do you start if you need good credit score for your credit application?
When is Your First Ever Credit Score Made?
Credit scores don’t only randomly show up when you are already of the right age to apply for credit. The truth is that you need a line of credit under your name for a score to start generation. After you opened your line of credit, usually your very first credit card, this also marks the start of calculating your credit score. It often happens in a period of 6 months.
Your credit score will not begin at zero contrary to popular belief. The lowest credit scores begin at about 300 although it is not likely that you will begin this low, either. One key factor that can have a negative effect on your credit score when you are establishing credit for the first time is your length of credit history that is probably rather short. But, don’t worry because, after several years of wisely managing your money, you can be well on your way to having a good or outstanding credit score.
What is a Good Credit Score, Anyway?
Many major credit score models vary from 300 to 850, the highest number of which represents the strongest score. But, credit companies like VantageScore or FICO don’t authoritatively decide what a bad or good credit score really is. It will all be up to the lenders. They are going to use your credit score to identify various things such as the following:
- The rate of interest they will charge for a loan
- The discount they might offer on the insurance policy
- Whether to decrease or increase the credit limit
- Whether the credit will be approved and the amount that will be approved
- Whether to close off a risky account
What can be considered as a bad or good credit score for lenders, then? All credit score models use a somewhat varied scoring system. This means that the scoring system is pretty much relative. What is considered as an acceptable score for one lender might be unacceptable for another.
Factors That Influence Your Credit Score
Various factors can affect your credit score. You can improve your credit after some time and make wiser financial choices if you know what really goes into the calculation of your credit score. According to FICO, the five key components of credit scores are the following:
- Payment history
- Length of your credit history
- New credit inquiries
- Credit utilization ratio
- A mix of credit accounts
Building credit can be a winding long road. Don’t expect to get a good credit score overnight.
Calculating credit score is very important. This article can help you in understanding how to calculate your credit score.