If you’re like many people, you probably think that having no credit is the same as having a bad credit score. But that’s not necessarily the case. Here’s what you need to know about your credit score if you don’t have any credit history.
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What is a credit score?
A credit score is a three-digit number that lenders use to decide whether to give you a loan and what interest rate to charge. A high score means you’re a low-risk borrower, which could lead to a lower interest rate on a loan. A low score could lead to a higher interest rate and could mean you won’t be approved for a loan at all.
What is a FICO score?
A FICO score is a type of credit score that makes up a substantial portion of your credit report. It’s a number that represents your creditworthiness to potential lenders, with 300 being the lowest possible score and 850 the highest. A good FICO score is generally considered to be any score above 700.
What is a VantageScore?
VantageScore is a credit scoring model developed jointly by the three major national credit bureaus: Experian, Equifax, and TransUnion.
Your VantageScore is a number between 300 and 850, and it can fluctuate depending on your credit habits. A score of 750 or above is considered excellent, while a score of 600 or below is considered fair.
There are many factors that can affect your VantageScore, but the most important ones are your payment history, credit utilization, credit mix, and length of credit history.
How is my credit score calculated?
One of the most important factors in your credit score is your payment history. This factor makes up 35% of your credit score so it is crucial to always make your payments on time. If you have any late payments, try to get them removed by negotiating with your creditor. If you have any accounts in collections, you should try to pay them off as soon as possible.
Your payment history is a good indicator of your risk to creditors. If you always make your payments on time, creditors will see you as low risk and will be more likely to offer you loans and lines of credit at lower interest rates.
Your credit utilization is the second most important factor in your credit score—it accounts for 30% of your FICO® Score—after payment history (which makes up 35%).
Credit utilization is the balance on your credit accounts compared to your credit limits. To calculate it, divide each account’s balance by its credit limit, then add up all of those utilization rates. That number is generally expressed as a percentage.
For example, let’s say you have three credit cards:
-Card 1 has a $5,000 limit and a current balance of $2,000. Your card 1 utilization would be 40%.
-Card 2 has a $10,000 limit and a current balance of $3,000. Your card 2 utilization would be 30%.
-Card 3 has a $15,000 limit and a current balance of $4,500. Your card 3 utilization would be 30%.
Your total credit utilization would be 100%, which is much too high. As you can see from this example, it’s important to keep your balances low relative to your credit limits (utilization below 30% is ideal).
Age of credit
One factor that influences your credit score is the age of your credit accounts. The credit scoring model looks at the date of each account in your credit history and gives more weight to accounts that are older. The average length of time since account opening is a factor in your credit score, so closing an older account could hurt your score.
Of course, there are other factors besides age that go into a credit score. The model also looks at things like payment history, the amount of debt you have, the types of credit accounts you have, and more. So even if you have an old account or two, closing them might not be the best move if it would cause your credit score to drop too much.
Types of credit
There are four types of credit:Revolving, Installment, Open-Ended, and Closed-Ended.
-Revolving: A revolving account is one where you have a set credit limit and can borrow up to that limit, pay off the balance, and then borrow again up to the limit. The most common type of revolving account is a credit card.
-Installment: An installment loan is one where you borrow a set amount of money and agree to pay it back, plus interest, over a set period of time. The most common type of installment loan is a mortgage.
-Open-Ended: An open-ended account is one where you can borrow up to your credit limit and there is no set repayment schedule. The most common type of open-ended account is a home equity line of credit.
-Closed-Ended: A closed-ended loan is one where you borrowed a set amount of money and agree to pay it back, plus interest, over a set period of time. The most common type of closed-ended loan is an auto loan.
When you apply for credit, an inquiry is made about your creditworthiness. Most inquiries stay on your credit reports for two years and can be accessed by anyone who looks at your report. However, only inquiries from the last 12 months are used when calculating your FICO score. Hard inquiries, which occur when you apply for a new credit account, can have a small negative impact on your score (between five and 10 points). However, if you shop for multiple loans within a short period of time (14 days), FICO scores will only count the first inquiry.
How can I improve my credit score?
There are a few things you can do to improve your credit score. One is to make sure you keep updated on your credit report so you can identify any errors and correct them. Another is to use a credit monitoring service so you can see your score and track your progress. You can also try to negotiate with your creditors to have them remove negative items from your report. Finally, you can look into credit counseling or credit repair services.
Make your payments on time
One of the easiest ways to improve your credit score is by making your payments on time. Your payment history is one of the most important factors in your credit score, so staying on top of your payments will help you improve your credit. You can set up automatic payments for your bills so you don’t have to worry about forgetting to pay them.
Keep your balances low
A good rule of thumb is to keep your balances below 30% of your credit limit. So, if you have a credit card with a $1,000 limit, try to keep your balance below $300. This will help improve your credit utilization ratio, which is one of the major factors that impacts your credit score.
Use a mix of different types of credit
There are many things you can do to improve your credit score. One important factor is the mix of different types of credit you have.
Credit scoring models typically consider five categories of information when determining your credit score:
-Length of credit history
Having a mix of different types of credit can help improve your score in two ways. First, it shows that you’re able to manage different types of debt. Second, it can help improve your “credit utilization” ratio, which is the second most important factor in your credit score.
Your credit utilization ratio is the amount of debt you’re carrying divided by the amount of available credit you have. For example, if you have a $1,000 balance on a credit card with a $5,000 limit, your credit utilization ratio is 20%. Generally speaking, it’s best to keep your credit utilization ratio below 30%.
So, if you don’t have any other types of credits (like a car loan or student loans), adding one can help improve your score. Just make sure you’re able to manage the payments before taking on any new debt.
Limit your credit inquiries
Every time you apply for new credit, an inquiry is made on your credit report. Inquiries can stay on your report for two years and too many inquiries in a short period of time can negatively impact your score. Try to limit the number of new applications to one or two per year. If you’re shopping around for a loan or credit card, do it within a 30-day period so that the inquiries only count as one on your report.
What are the consequences of having a low credit score?
Having a low credit score can negatively affect your life in many ways. For example, you may be denied for loans, credit cards, and mortgages. You may also have to pay higher interest rates if you are approved for a loan. Additionally, a low credit score can affect your insurance rates and your ability to rent a home or apartment.
You may be denied for loans and credit cards
A low credit score can limit your borrowing options and lead to high interest rates if you are approved for a loan or credit card. It may also result in denial of your application for loans and credit cards. A low credit score can also make it difficult to find a place to rent or lease a car. Landlords and leasing companies may view you as a high-risk tenant, which could lead to them denying your application.
You may have to pay higher interest rates
If you have no credit, or a very limited credit history, you may have a hard time qualifying for new lines of credit. And, if you are able to qualify, you’re likely to pay higher interest rates than consumers with good or excellent credit scores. That’s because lenders perceive borrowers with no credit as being higher risk — they don’t have a track record of faithfully repaying their debts.
Just how high your interest rates will be depends largely on the type of loan or credit card you’re applying for. For example, the average APR on most credit cards is currently around 17%, but consumers with bad credit often pay APRs of 24% or higher. The same is true for auto loans — the average APR for a new car loan is currently around 4%, but borrowers with bad credit may end up paying 10% or more.
In addition to higher interest rates, you may also have to pay additional fees, such as an annual fee, if you’re approved for a credit card or loan with bad credit. And, if you’re able to qualify for a traditional loan from a bank or credit union, you may be required to pay private mortgage insurance (PMI) if your down payment is less than 20%.
You may be denied for a job
Your credit score affects more than just your ability to buy a car or a house. Employers are increasingly pulling credit reports on job applicants and using them as part of their hiring decisions. A low credit score could cost you a job, or at the very least, result in a lower salary.