Your credit score is a crucial component of your financial health. It can determine whether or not you get approved for loans, credit cards, and even rental agreements.
Having a good credit score can save you money by allowing you to secure lower interest rates on loans and credit cards. But how long does it take to build a credit score?
The answer to that question is not straightforward. It depends on various factors such as your current credit score, credit history, and payment behavior.
However, there are some general guidelines that can give you an idea of how long it might take to build your credit score.
Understanding Credit Scores
Before diving into how long it takes to build a credit score, it’s essential to understand what a credit score is and how it’s calculated. Credit scores range from 300 to 850, with a higher score indicating better creditworthiness.
FICO and VantageScore are the two most widely used credit scoring models. 90% of lenders use FICO scores, while the remaining 10% use VantageScore. Both scoring models take into account the following factors:
- Payment history
- Credit utilization
- Length of credit history
- Types of credit used
- Recent credit inquiries
Each factor is weighted differently, and the exact formula used to calculate your credit score is not disclosed. However, you can still take steps to improve your credit score.
Building your credit score
Now that you understand what factors go into your credit score let’s talk about how to build it.
Your payment history significantly impacts your credit score, accounting for 35% of your overall score. This means that paying your bills on time is essential to building and maintaining a good credit score. Late payments can stay on your credit report for up to seven years, significantly impacting your score.
If you have missed payments in the past, the best thing you can do is to start paying on time moving forward. Over time, the impact of your missed payments will lessen, and your credit score will improve.
Credit utilization is the amount of credit you use compared to the amount of available credit. It accounts for 30% of your credit score.
Ideally, you should aim to keep your credit utilization below 30%. For example, if you have a credit card with a $5,000 limit, you should avoid carrying a balance over $1,500. High credit utilization can signal to lenders that you’re relying too heavily on credit, negatively impacting your score.
Length of Credit History
The length of your credit history makes up 15% of your score. It takes time to build a credit history, so the longer you’ve had credit, the better.
If you’re starting to build your credit, it’s a good idea to get a credit card and make small purchases that you can pay off each month. This will show lenders that you’re responsible and can manage credit effectively.
Types of Credit Used
Your credit types make up 10% of your credit score. Having a mix of credit, such as a credit card and a car loan, can show lenders that you can manage different types of credit effectively.
However, don’t open new accounts to have a mix of credits. Only open accounts that you need and can manage responsibly.
Recent Credit Inquiries
Finally, recent credit inquiries account for 10% of your score. When you apply for credit, such as a loan or credit card, the lender will check your credit history. This is called a hard inquiry and can temporarily lower your score.
While shopping around for the best rates is important, don’t apply too much credit too quickly. Multiple hard inquiries in a short period can signal to lenders that you’re a high-risk borrower.
How Long Does It Take to Build a Credit Score
Now that you know how to build your credit score, let’s answer the main question – how long does it take to build a credit score?
The answer is that it depends. It depends on how much work you need to do to improve your credit score and how consistently you follow the abovementioned guidelines.
Establishing a credit score can take six months if you have no credit history. If you have a low credit score or missed payments in the past, it can take up to two years to significantly improve your score. However, you can start seeing improvements within a few months with consistent effort.
Building your credit score takes time and effort, but it’s worth it. A good credit score can save you money and open up opportunities that may not have been available to you otherwise.
You can build a strong credit history by understanding what factors affect your credit score and taking consistent steps to improve it.