Mr. Dryden, a fictional character in the film Lawrence of Arabia, made a startling observation when conversing with General Murray:
Big things have small beginnings, Sir
The same can be said for building credit. By now, you may wonder how long does it take to build credit before you can qualify for a loan.
Your goal is to establish a credit score with the three major credit bureaus that accumulate financial information of individuals and businesses. Financial institutions such as banks and online lenders analyze this credit data to decide whether you can repay a loan.
In this post, you’ll learn how long it takes to build credit in a variety of circumstances.
A low credit score is a red flag that tells lenders that you don’t repay debt. To offset this negative image, pay off debt, and keep credit card balances low or paid off.
Why does it take time to build credit?
If you don’t use a credit card to make purchases or if you don’t repay a loan, there are no financial records for credit bureaus to calculate a score. Likewise, they can’t really tell if you’re a responsible creditor just from one month of information, they need more time to get a more accurate picture.
How long does it take to build credit?
Fortunately, building credit isn’t hard or impossible to do. As you build credit steadily, you show lenders that you can handle your finances responsibly. Remember, longevity works in your favor.
But knowing how long it will take you to build credit is not an exact science. Credit bureaus don’t advertise this type of information. How long it takes you to build credit will depend on many factors and can vary from person to person.
Nevertheless, it’s not impossible to know, on average, how long it can take. You can use the information below as a guideline to help you plan for the future of your personal finances and your business.
How long does it take to build credit from scratch (no previous credit history)?
To create a credit score, you must have a history of personal and business financial transactions that reflect purchases you made on credit and a record of payments. Over time, those details become a permanent credit history indicating how well you handle money.
So, how long does it take to build credit?
On average, it could take you up to six months to establish credit from scratch. This is true, at least, for a FICO Score, the most used score. Other scores, like the VantageScore, can take a month or two.
This means that six months of credit activity is enough for credit bureaus to get a good idea of what type of credit user you are. This means you need to have at least one credit account open for this time and make sure the financial institution reports your payments to credit bureaus.
If you play your cards correctly, you can end up with a decent credit score after this 6-month period.
Building credit from the ground up and achieving an excellent credit history are two different things. While getting your first score might not take that long, working your way up the credit ladder to an excellent score is more time-consuming.
If you want to get a good or an excellent credit score, you’ll have to continuously work to get there.
How long does it take to improve your credit score?
While creating a credit score from scratch is (relatively) quick, improving your existing credit can take longer. Honestly, it all depends on why you’re trying to get a better credit score.
1. If you just created your credit history and want it to get better
This is not an impossible thing to do, but it will take time and patience. Just know that you’ll need to work little by little. You can even boost your credit score by 60 points in 60 days.
Something as simple as consistently paying your bills on time, consolidating credit card debt, and paying off credit card balances each and every month raises your score exponentially.
How much time it actually takes you will depend on your current credit score and what’s your credit goal.
For example, if you have a bad credit score, let’s say a score in the 500s, and you want to get to somewhere along 650, it could take you from 12 to 18 months. This will happen, of course, if you have good credit usage during this period.
On the other hand, getting to an excellent score can take a bit longer, even several years.
2. If your credit score has been previously damaged
If you’re in this situation, rebuilding your credit will take a lot of time.
Major problems in your report can take years to disappear from your credit history. For example:
- collection accounts, missed payments and foreclosure stay on your record for 7 years
- bankruptcies remain on your record up to 10 years
And after that period is over, you’ll have to continually work to help your score recover, which can take some more years.
Please, don’t be discouraged and don’t stop working towards a good credit score. Giving up is easy, but working towards something better is more rewarding.
How to improve your credit score
Depending on where you’re at, you can start building credit in as little as 3 weeks to 60 days.
In addition to never exceeding 30% of your credit capacity, limiting the number of credit applications you complete, and opening a checking account, you can build credit as described in the following scenarios.
- With a loan: It’s better to take out a loan with a payment you can afford and terms no longer than 24 months. The key to building credit with a loan is always to make timely payments. Any late payments beyond 30 days will be reported to the credit bureaus.
- With a credit card: Your first credit card should have a low spending limit so you can pay the balance in full each month. By making small purchases and repaying the debt on time, you create a positive credit profile in very little time.
- New vs. old credit cards: Limit the number of new credit card accounts you open and don’t close unused credit cards you’ve paid off to avoid increasing your credit utilization ratio.
- With a secured credit card: Lenders will require a security deposit before issuing a secured credit card. As long as you make timely payments, you’ll see an uptick in your score in 1-2 months.
- Reporting rent: By reporting the rent you pay to the credit bureaus, you can see your credit score go up in as little as 3 weeks. Ask your property manager to report your rent. If they don’t, you can do it.
- Reporting utilities: Get an Experian Boost by reporting utility and telecom payments to their Experian credit file.
- Become an authorized user: Open a joint account with someone who already has a credit history. Both of you should share your cost of the payments and any interest charges. By becoming an authorized user on a joint account, you learn how to repay debt and start building a credit history immediately.
- Purchase electronics: Buy your favorite electronic gadgets by paying back what you owe in installments. Verify that the retailer reports your payments to the credit bureaus by getting a free credit report from one of the three bureaus.
What hurts my credit score?
These are situations when you need to take steps to build credit.
If you’re in one of them, start strengthening your credit score as soon as possible.
If you’re not in one of these situations, avoid them at all costs!
- After a late payment: Your credit history makes up 35% of your credit score. If making late payments isn’t a habit and you now make timely payments, ask the creditor to remove any late payment notations from your credit report. If possible, start making multiple payments each month. If late payments are recorded by mistake, dispute those entries and ask creditors to remove them.
- After closing an account: By closing a long-standing account, you lose the available credit as well as credit history. It’s better to keep accounts open with high credit limits and low balances. Closing one account has a minor credit score impact, but closing several at once could cause your credit score to dip significantly if total balances exceed 35%. In that situation, it could take up to 3 months to recover your prior credit status.
- After bankruptcy: Depending on the type of bankruptcy and current laws, bankruptcies can stay on your credit report from 7 to 10 years. That doesn’t mean you wait until they’re removed to build credit. You can cosign a loan, get a joint account, or pay bills on time. It’s important to start rebuilding credit as soon as possible until the bankruptcy is discharged from your credit report.
- After a foreclosure: Figuring out what caused the foreclosure is the first step to improve your credit score, so a loan default never happens again. You can work with a credit counselor, create a budget and stick to it, and get a secured credit card to start building credit.
- After a debt settlement: If you settled a debt with a creditor, that means you were unable to make payments for at least six months. Obviously, your credit score took a downward plunge. Once you pay off the settled debt, keep checking your credit report for updates. Then, start applying for small amounts of debt, such as store or gas cards. Make it a rule to pay these off in full and on time. You can take on more credit as your credit score improves.
- After maxing out a credit card: Get control of overspending and create a spending plan that’s within your budget. Avoid taking on new debt, negotiate a comfortable repayment plan, and see if the credit card company will reduce the interest rate.
- After creditor charge-off: When a creditor decides they can’t collect a debt from you, they may write off the amount which adversely affects your credit score. Contact the creditor and ask them to contact the credit bureaus to remove the charge-off entry once you pay the debt in full.
- Public records: Tax liens and money owed to the IRS used to be part of a credit score. In 2018, they were removed by the three credit bureaus. The same can be said for civil judgments, while they used to be part of your credit report, that is no longer true. It’s important to review your credit report regularly to make sure these types of entries never appear on your report. LexisNexis Risk Solutions reported that roughly 11% of consumers saw their credit scores go up 30 points when this information was deleted.
Be careful with your credit history
As you can see, building credit doesn’t happen overnight, but harming it can. The worst credit scenario is to put building excellent credit on hold before you start or expand a business.
Camino Financial has an immediate solution for you, so you achieve your business ownership goals. We issue loans to no-credit score owners. That’s right. After we review your complete financial picture, it’s possible to qualify for a loan without having a credit history.