Photo: 401 (K) 2013
How long does it take to improve your credit? That’s a great question.
Unfortunately, the answer is, “It depends.” It depends on what your credit score is now, and why. And it depends on how much you want to improve your credit score.
Serious credit problems — foreclosures, collections records, etc. — will stick to your credit report for seven to 10 years. During that time, you’re not likely to achieve a perfect credit score. But, on the other hand, you can balance out these negative reports with good credit habits well before the decade is up.
Here’s what you need to know about what credit score to shoot for, how your score is calculated, what harms your score, and the quickest way to bring it up again:
What’s a Good Credit Score?
Credit scores range from 300 to 850, and a score of 760 or above is generally considered excellent. If your score is in this range, you have no reason to be asking yourself this question. But if your score is below 760, here’s a breakdown of what you can expect based on your credit score range:
• 300-580: You’ll be denied credit, or only approved for the highest interest rates.
• 581-650: You may qualify for credit, but it will be at high interest rates.
• 651-710: You will qualify for credit at moderate interest rates.
• 711-750: You’ll qualify for credit at competitive interest rates.
• 751 and up: You’ll qualify for credit at the lowest most competitive rates available.
If you want to get the best rates (and who doesn’t?) your credit score goal should be to get above 750. But if you’re at the very bottom rung right now, that may take a while. Keep in mind, though, that any improvement of 100-200 points could have a significant impact on your credit availability and rates.
Also consider why you want to increase your credit. If your plan is to buy a home, you’ll want a score of at least 620 just to qualify. Of course, the higher the better, because you’ll get a lower rate with a higher score. If you want to buy a car, however, you can qualify with a score of less than 620. Your rate may not be great, but you’ll get the loan.
Know Where You’re Starting From
To figure out how long it will take you to improve your credit score, you need to know where you’re starting from. You can get a free credit report from each of the three credit reporting bureaus once a year, but this report does not include your credit score. Generally, you’ll have to pay for your numerical credit score, though there are a few ways to request one for free.
At myFICO, you can get a copy of your FICO score — your Equifax or FICO Standard, or your TransUnion score. Each report costs $19.95 and includes your FICO score, your Equifax or TransUnion credit report, and a FICO score simulator.
The simulator is a great tool that can help you figure out how long it will take to improve your credit score. Basically, it lets you simulate various changes to your credit report, so you can see which changes will have the biggest impact. That way, you can figure out your best route for improving your credit score.
One other option is to check out Score Watch from myFICO. The service comes with a 10-day free trial and a monthly fee after that. If you just want one copy of your score, sign up for the trial and cancel it within 10 days to avoid the recurring fee.
How Your Score is Calculated
Understanding how your score is calculated is the first step to understanding how to improve it. FICO’s algorithm uses weighted information to calculate your score. Some pieces of your credit report — like your payment history — are heavier in your score than others. The breakdown of a FICO score is:
• 35 percent is based on payment history.
• 30 percent is based on credit use.
• 15 percent is based on length of credit history.
• 10 percent is based on types of credit used.
• 10 percent is based on recent searches for credit.
As you can see, payment history is the No. 1 factor in your credit score. A long history of on-time bill payments will go a long way toward improving your score and keeping it high. And remember that late payments or collections problems are especially damaging on your report.
Here’s the good news: recent payments count more heavily than older payments. So if an account went to collections four years ago and is still on your credit report, if you’ve made on-time payments since then, you’ve probably mostly made it up.
Credit use is the amount you owe versus the amount of credit you have when it comes to revolving credit, like credit cards. For the best credit score results, you’ll want to keep your borrowing below 30 percent of your total credit limit. If you’re carrying high credit card or home equity loan balances, you’re probably hurting your credit score.
The length of your credit history is another factor in how your credit is calculated. The longer you’ve had credit of some sort, the better your score will be.
So if you’re just starting out, there’s no way you can have a perfect score for a few years, since this requires a long credit history. But you can keep your average account age longer by leaving old credit card accounts open, even if you leave the balances at zero.
The types of loans you have will also affect your credit score. Having a mix of loans — installment loans like car payments and revolving loans like credit cards — will help you keep your score up. However, taking on extra debt just to fulfill this requirement probably doesn’t make much sense, especially if extra debt might cause you to miss monthly payments.
Finally, recent inquiries for new credit will impact your credit score. If you’re shopping around for credit, you’ll look riskier to potential lenders. So searching for loans over a limited period of time will help keep your credit score up.
What Harms Your Score the Most?
Unfortunately, some of the things that harm your credit score the most will also stick to your report the longest. Here are some of the worst offenders:
- Late payments: seven years
- Foreclosures: seven years
- Collections: Up to seven years (depends on the age of the debt being collected)
- Public record: Up to seven years
- Chapter 13 bankruptcy: seven years
- Chapter 7 bankruptcy: 10 years
- Unpaid tax liens: No expiration
These numbers look a little scary, but the truth is that, with hard work, you can bounce back from nearly any credit disaster well before seven years is up. For instance, you can start rebuilding your credit within months of a foreclosure or bankruptcy.
And, remember, older problems on your report — even if they still appear there — count for less than newer problems. So by committing to practicing good credit habits starting now, you can probably pull your credit score up more quickly than you’d think.
How to Boost Your Credit Score
Before we get into how long it might take to boost your credit score, let’s look at a practical breakdown of steps you can take to do it.
Correct Errors in Your Report
First, pull a copy of each of your credit reports (remember, you get one free from each bureau every 12 months) and check for errors. While even minor errors need to be corrected, check for more egregious errors very carefully. Here are a few to look especially closely for and then dispute as much as possible:
- Accounts that aren’t yours
- Accounts that you paid on time, in full that are listed as “settled” or “charged off”
- Old bankruptcies, late payments, etc., that have passed the credit report expiration limits
- Credit limits reported as lower than they actually are
- Accounts listed as unpaid that were actually included in a bankruptcy filing
If you find any errors, take the steps listed in this article to correct them.
Make a Habit of Paying on Time
It’s never too late to start paying on time. Get out a calendar, write down all your due dates, and start paying your bills a few days before they’re due. This one simple habit, carried out over time, will do more for your credit than just about anything else. Remember, payment history is the biggest portion of your credit score, so pay attention to this particular area!
Pay Down Credit Card Balances
Since debt-to-credit ratio is a huge part of your credit score, getting these back in order is another great way to improve your credit quickly. If you have some money in savings, you may want to use some of it to pay down (or, better yet, pay off) credit card balances. This will save you money by reducing the interest you pay on your credit card balances and by increasing your credit score almost immediately, giving you better interest rates on debt down the road.
Increase Credit Limits
If you don’t have money available to pay down credit card balances, but you’ve been a good customer, ask about increasing your credit limits. Since your credit score looks at the ratio of balances to available credit, not necessarily the amount of debt you’re carrying, this has the same effect as paying down credit card balances. If you can pay down balances, this is the better choice, but if not, a higher credit limit can boost your credit score.
Build Good Credit Card Use Habits
Once you have your credit cards paid off, don’t close them. Having a mix of accounts, including credit cards, will keep your credit score higher. But do build good habits, such as only using your cards for certain purchases that you then pay off at the end of the month.
Add (Smart) Loans to the Mix
If you don’t have a blend of installment and revolving loans, consider adding a new loan to the mix. Again, be sure this is a smart financial choice for you and that you’ll continue to make monthly payments on time. A small installment loan, like a car loan or personal loan, can help boost your credit score, though.
Ask Your Lender for Some Leeway
If you recently made a late payment when you nearly always pay on time, call your lender. If you’re a good customer, they may agree to erase that late payment from your credit report. Some lenders will do this after you make several months of on-time payments. Because late payments have a hugely negative effect on your credit score, this simple step could really help raise your score.
Don’t Close Old Accounts
If you’re paying off credit cards, it can be tempting to close those accounts. But don’t! Remember that you want to keep your average account age as old as possible, so leaving older accounts open is the best way to do this. Just be sure you stay on top of any fees you might be charged and steer clear of the temptation to run up account balances again.
Shop for New Loans Quickly
If you’re in the market for a new loan, shop your options quickly. Credit inquiries for the same type of loan that come in within a week or two generally count as one pull on your credit report. That means that your score isn’t dinged by as much as if you take months to shop for a car loan.
How Long Will it Take?
Now, the question you’ve been waiting for an answer to. How long will it take to rebuild your credit score if you follow these steps?
The answer is still that it depends. It depends on what you’ve done to harm your credit score and how high your credit score was to begin with.
The saying, “The bigger they are, the harder they fall,” applies to credit scores. If you have a very high credit score and make a single late payment, you’ll notice a bigger drop in your score that will, subsequently, be more difficult to recover from.
A 2011 survey from FICO showed the effects of a payment that’s 30 days late on a mortgage for individuals with different scores. The results:
- Those with a score of 680 dropped to 530
- Those with a score of 720 dropped to 525
- Those with a score of 780 dropped as low as 620
The interesting thing about the report is that it went on to state how long it would take these consumers to recover. The truth is that it takes a long while to completely recover from negative events, especially late payments, bankruptcies, foreclosures and the like.
For instance, the consumer with the score of 680 would take nine months of good credit history to recover. The person with the score of 780 would need three years to rebuild from that one late mortgage payment.
The good news is that not every single late payment will be reported to reporting bureaus. If your payment is less than 30 days late (for some lenders, if it’s less than 60 days late), it probably won’t be reported at all. So the faster you can catch up and bring your accounts current, the better off you’ll be.
With all this said, some negative credit information, like a high debt-to-credit ratio, can be remedied almost immediately. As soon as you lower that ratio, your score will start to rise. So look into these steps for improving your credit score for the quickest possible path to boosting yours.