How Long Does It Take to Improve Your Credit Score? - The Motley Fool

Short answer: Improving your credit score could take a while. But it's worth it.

Bad credit sucks. It sticks you with high interest rates on credit cards and loans -- assuming you get approved at all -- and it can impact your ability to secure a job, an apartment, or even an affordable cell phone plan. The good news is, you don’t have to be stuck with bad credit forever. You can improve yours by understanding the factors that influence your score and making responsible financial decisions moving forward.

How long will it take to improve your credit score? That depends on where you started and what score you're hoping to get to. It may only take a few months or it could take several years. You can't undo what you've already done, so you must wait for old black marks to fall off your credit report. But you can speed up the process by making smarter decisions from here on out.

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What's a bad credit score?

Before we jump into the factors influencing your score and how to improve it, we first need to define which credit scores need improving. The two most popular credit scoring models are the FICO® Score and the VantageScore. Both use a scoring system that rates people from 300 to 850, with a higher score being better. 

To give you an idea of what constitutes a bad credit score, FICO defines a score between 580 and 669 as "fair" and a score between 300 and 579 as "poor." VantageScore sets the boundaries a little differently, defining a score between 601 and 660 as "near prime" and a score below 600 as "subprime." To complicate things a little further, each individual lender has its own criteria and even if your credit score is above this range, your application may still be declined.

You won't know what credit score lenders are looking for, so you should aim for a score in the 700s or 800s to be safe. This is pretty universally considered good credit and you shouldn't have any problems getting loans or credit cards if you fall within this range. Since FICO considers scores of less than 670 to be fair or poor, you should aim to improve yours if it falls within this range.

How long does it take to clear a bad credit history?

Developing new, more responsible habits is the first step toward improving your credit, but your previous bad credit history won't just disappear overnight. Late payments, repossessions, foreclosures, charged-off accounts, and civil claims judgments all remain on your credit report for seven years. Chapter 13 bankruptcies also stay on your report for seven years, while Chapter 7 bankruptcies remain on your report for 10 years.

You're unlikely to reach a sterling credit score until all of these old negative items fall off your credit report, but that doesn't mean you're seven to 10 years away from a decent score. Credit scoring models give more weight to your more recent credit history. So a late payment will hurt you a lot if it just happened last month, but if it's five years old and you haven't made a late payment since, it won't have as much of an impact. If you're able to demonstrate that you're turning over a new leaf, lenders might be willing to work with you at this point, even if there are still a few negative things on your report.

How to improve your credit score

Improving your credit is pretty simple once you understand the five main factors that affect your credit score. Your payment history is the most important; it accounts for between 35% and 41% of your score, depending on the scoring model you're looking at. Paying your bills on time every month is one of the most important steps you can take. Setting up automatic payments or reminders is a great way to do this. 

If part of the issue is that you don't have enough money to pay what you owe, you'll have to make some changes to your budget -- either by cutting discretionary spending, increasing your income, or both.

Your credit utilization ratio is the other big player in your score, making up 20% to 30% of the weight in your calculation. This primarily looks at credit cards, in particular the relationship between your average monthly spending and your credit limits. Lenders don't like to see you using more than 30% of your credit limit each month because it indicates that you cannot support your lifestyle without relying heavily on credit. 

Lowering your ratio is pretty easy as long as you're not carrying a balance. You could spread your spending around among several credit cards so your monthly spending on each remains under 30%, or just use cash more often and your cards less. Requesting a credit limit increase is another option, but your card issuer might refuse you if your credit score is already bad. You could also pay your bill twice per month. The credit bureaus only get balance and payment updates once per month, so if you pay your balance off midway through and again at the end of the month, it'll appear as if you spent less than you did.

You might struggle to lower your credit utilization ratio if you have credit card debt because every month it'll show that you're using a large amount of your available credit. In that case, work to pay it down. Devote your spare cash every month toward paying down debt and use a balance transfer card to temporarily halt the growth of your balance. Put year-end bonuses, tax refunds, and other windfalls toward your debt too until it's paid off. Then, avoid running up new debt or you'll be back in the same situation as before.

The other three key factors influencing your credit score are your credit mix, your average account age, and the hard inquiries on your report. Your credit mix refers to the different types of credit accounts in your name. Lenders like to see some experience with revolving debt, like credit cards, and installment debt, like a mortgage or personal loan. But this only accounts for about 10% of your credit score, so it's not a huge deal if you only have one type of credit. Don't take out new loans you don't need just for the sake of increasing your credit mix.

Over time, your average account age will increase, assuming you're not closing your old accounts. It's usually best to leave old credit cards open even when you're not using them unless they charge an annual fee. You can use them as a backup if your primary credit card is stolen and they'll help your average account age. If you are going to close credit accounts, try to limit yourself to one every six months or so to minimize the impact on your score.

Hard inquiries happen every time you try to open a new credit account and they drop your score by a few points. This isn't an issue if you're approved, but if you’re not, you just cost yourself for no reason. Too many inquiries can indicate someone heavily dependent on credit, so don't apply for new credit cards too often. For loans, the credit bureaus make an exception for rate shopping. This means that all inquiries that take place within a 14- to 45-day period, depending on the credit scoring model, are considered a single inquiry. This will minimize their effect on your score, since it’s considered common practice to shop around before settling on a loan.

What is the best way to rebuild credit?

All of the above factors are important for raising your credit score. But what happens if your score is so bad that you can't find any lenders willing to give you a chance to show you've changed? If you can't get a loan or a credit card anywhere, there are still a few options left. 

A secured credit card is one of the most popular options. This is a regular credit card, but it typically has low credit limits -- a few hundred dollars or less -- and you must put down a security deposit equal to that credit limit. If you fail to pay back what you owe, your lender keeps the security deposit. Because there's no risk to lenders, secured credit cards are open to individuals with poor credit, and regular, on-time payments can help you increase your score over time. If you decide to cancel the card later and you don't have an outstanding balance, your card issuer will refund the security deposit.

Another option is a credit builder loan. This is a type of installment loan specifically designed to help you rebuild bad credit. These loans are for small amounts -- $3,000 or less. You take out the loan and your lender places the money into an account where you cannot access it right away. You make regular monthly payments with interest, just like a regular loan, and when you've paid back the whole thing, the lender releases the amount that's been sitting in the account. This strategy will cost you a little money in interest, but it gives you a chance to demonstrate that you can borrow money and keep up with your payments.

Ultimately, the best way to improve your credit score is the one that's easiest for you to keep up long term. If you have existing credit cards or loans, start with those. Make an effort to pay on time, pay down existing debt, and limit how much you charge to your credit cards each month. 

It will take months before you see a significant increase in your credit score, but stick with it. As your newer payment history takes precedence and the negative marks on your report fall off, the winds will begin to change in your favor.

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