If you don’t have any credit history, you may be wondering how your credit score is calculated. While it’s not possible to get a precise score without any credit history, there are some ways to estimate it. Here’s everything you need to know about calculating and building your credit if you have no credit score or credit history.
What Is A Credit Score?
A credit score is a numerical representation of your creditworthiness. It’s used by lenders to determine whether or not you’re a good candidate for a loan or line of credit, and it can also affect the interest rate you’re offered.
There are several different types of credit scores, but the most common is the FICO score, which ranges from 300 to 850. The higher your score, the better.
How Your Credit Score Is Calculated
Your credit score is one of the most important numbers in your life. A good credit score can open doors and help you qualify for better interest rates, while a bad credit score can make it harder to get approved for loans and lines of credit. So, how is your credit score calculated?
Payment History
One of the most important factors in your credit score is your payment history. This includes whether you’ve made your payments on time, as well as any bankruptcies or foreclosures in your past. Payment history makes up about 35% of your FICO® credit score, so it’s important to do everything you can to make sure all your payments are made on time.
Amounts Owed
Another important factor in determining your credit score is the amount of money you owe. This is often referred to as your “credit utilization ratio.” To calculate this, simply divide the total amount of debt you owe by your total available credit limit.
For example, if you have a $500 balance on a credit card with a $1,000 limit, your credit utilization ratio would be 50%. Credit utilization makes up about 30% of your FICO® score, so it’s important to keep it low.
Length of Credit History
The length of your credit history also plays a role in determining your credit score. In general, the longer you’ve been using credit, the better. This is because it shows lenders that you’re a responsible borrower who can be trusted to repay debts. Length of credit history makes up about 15% of your FICO® score.
How Credit Scores Work
Credit scores are calculated using a variety of factors, including payment history, amounts owed, length of credit history, and more. The exact formula used to calculate your score is proprietary information that belongs to the credit scoring agency.
However, we do know that late payments, high balances, and short credit history can all have a negative impact on your score. On the other hand, timely payments, low balances, and long credit history can all have a positive impact.
Types of Credit Scores
There are three main types of credit scores: FICO® Scores, VantageScore®, and Experian Boost™. FICO® Scores are the most widely used type of credit score and are used by 90% of lenders.
VantageScore® is the second most popular type followed by Experian Boost™. Experian Boost™- is a new type of credit score that includes utility and cell phone payments in addition to traditional factors like payment history and amounts owed.
Tips To Move From Having No Credit Score To Having A Good One
A good credit score is important for many reasons. It can help you rent an apartment, get a mortgage, and even land a job. If your credit score is low, you may be paying higher interest rates on loans and credit cards, and you may have difficulty getting approved for new lines of credit. Thankfully, there are things you can do to improve your credit score. Here are four tips:
1. Check your credit report regularly.
You’re entitled to one free copy of your credit report from each of the three major credit bureaus every year. Reviewing your report regularly can help you catch errors and identify any questionable activity. If you see something on your report that doesn’t look right, dispute it with the credit bureau.
2. Make all of your payments on time.
This is one of the most important factors in determining your credit score. Payment history makes up 35% of your FICO score, so it’s important to always pay your bills on time, including your mortgage, car payment, student loans, and credit card bills. Even one late payment can negatively impact your score.
3. Keep balances low on credit cards and other revolving accounts.
This is known as “credit utilization,” and it makes up 30% of your FICO score. To keep your score high, keep balances below 30% of their total limits at all times. So, if you have a credit card with a $1000 limit, try not to let the balance exceed $300 at any given time.
4. Apply for new lines of credit sparingly.
Every time you apply for a new line of credit—whether it’s a store card, a car loan, or a mortgage—the creditor will pull your credit report as part of the application process. This is known as a “hard inquiry,” and too many hard inquiries in a short period of time can negatively impact your score by a few points each time.
So if you’re planning on applying for new lines of credit, space out the applications over several months to minimize the impact on your score.
Conclusion
Credit scores are important because they give lenders a way to assess the risk involved in lending you money. A good credit score means you’re more likely to repay your debts on time, while a bad credit score indicates that you may be a high-risk borrower.
If you’re wondering how your own credit score is calculated, remember that payment history, amounts owed, and length of credit history are all important factors. You can get a free copy of your credit report from each of the three major reporting agencies once every 12 months, so checking your score is easy.
Other readings:
Employer Credit Checks – 6 Reasons Why They Do It And Why They Matter
Credit Card Reporting Date – When Do Credit Card Companies Report To Credit Bureaus?