How Long does it take to Build Credit? Explained in Simple Terms

Are you wondering “how long does it take to build credit?” Review these simple steps, today, and learn what you can do to build credit as well as what to avoid or minimize. 

Building good credit from nothing is not impossible, and “starting from scratch” is a place we have all been at one point. While it does take time and commitment, building good credit is achievable. Ready to start? Let’s go!

How Long does it take to Build Credit? Essentials and Getting Started

Let’s be honest upfront: building good credit is hard work, and it will take a focused and consistent effort to get and maintain a good Credit Score. Adopting a few good financial habits will get you started and on your way. Keep after it and you will soon find yourself enjoying the benefits of an improved Credit Score.

Let’s start with some key information, meet the players, and understand how your score is calculated. From there, we’ll uncover some ways you can apply the knowledge. Soon, we will have an answer for the question “how long does it take to build credit?”

Understanding Credit Scores and Bureaus in Simple Terms

Often, along with the question of “how long does it take to build credit,” there is a sense of mystery surrounding credit scores and how to get a better one. Let’s start with some essential information about how this all works so we can get a better understanding on what to do better (and what to avoid!). We’ll cover FICO and VantageScore, two models used to provide your credit scores.

What is a Credit Score, anyway?

Your credit score is a number used to identify your relative level of risk to potential lenders. A higher number (FICO considers 800+ as “Exceptional”) suggests you are a better risk, one with good financial habits. As an example, Equifax describes, “credit card companies, mortgage lenders, and insurance companies pull credit scores to use as one of the factors to determine your creditworthiness or credit risk.”

There are different scores for different industries, and there are based on different models. At a high level, those models are predictive, and the variations are used by creditors to determine risk of their client base.

What are Credit Scores predicting? 

The Credit Score predicts the “likelihood of defaulting on payments you owe,” which is to say “going 90 days or more without paying a debt obligation.” 

This score rooted in in various credit models, which translates your credit usage data into an output, a credit score, which lenders (and others) can use to gauge your financial risk. Keep reading for more on credit scoring, next.

FICO (Fair Isaac Corporation) Basics

FICO, which stands for Fair Isaac Corporation, is the industry leader in credit scoring. It comes in several flavors ranging from general credit worthiness (base FICO model), to specific industries such as for credit cards, loans, etc.

FICO scores are advertised as being used by “top lenders,” across the board and are “based on your Experian, TransUnion and Equifax reports.” FICO has been around since the late 1980s and has evolved and adapted overtime to “better meet the demands of today’s credit usage” as well as “meet the needs of different types of lenders.” It is reasonable to expect some degree of variation between them, and between Credit Reporting Bureaus (which we will address more in this post).

How is a FICO Score Calculated?

First, and generally speaking, an individual needs about 6 months of active credit history before they can receive a FICO score. That score is based on the following 5 sources which are weighted accordingly and are based on activity from your credit reports.

• 35% Payment History (paying past accounts on time)
• 30% Amounts Owed (amount you’re using)
• 15% Length of Credit History (how long you have had credit)
• 10% New Credit (frequency of credit inquiries and new credit openings)
• 10% Credit Mix (credit, retail, loans, etc.)

By the way, FICO publishes the following score ranges, from Poor to Exceptional, summarized below.

• Poor (300 – 579)
• Fair (580 – 669)
• Good (670 – 739)
• Very Good (740 – 799)
• Exceptional (800 – 850)

VantageScore Basics

VantageScore is a combined effort between Equifax, Experian, and TransUnion (Credit Reporting Companies) using proprietary data modeling which we will broadly discuss in this section. One key differentiator from FICO, VantageScore uses one model used across each of the credit reporting companies.

As presented on their website, the credit score “influencers” to your individual rating are as follows:

• Extremely Influential: Total Credit Usage, Balance and Available Credit
• Highly Influential: Credit Mix and Experience
• Moderately Influential: Payment History
• Less Influential: Age of Credit History
• (Even) Less Influential: New Accounts

Think of these as guidelines on ways to improve your credit score, too! More on that, coming up.

How is a VantageScore Calculated?

According to TransUnion’s site, most credit scores are calculated with the following methodology and weighting:

• 40% Payment History
• 21% Length of Credit History
• 20% Credit Utilization
• 11% Total Amount of Recent Reported Balances
• 5% New Credit Accounts
• 3% Available Credit

VantageScore ranges are different, depending on the model. However, the most recent versions follow the same end points as FICO. Here is a summary:

• Very Poor (300 – 499)
• Poor (500 – 600)
• Fair (601 – 660)
• Good (661 – 780)
• Excellent (781 – 850)

Credit Reporting Bureaus

The three main credit bureaus are are Equifax, Experian, and TransUnion. This is where your data on credit limits, new loans, payment history (etc.) is stored. The three will then generate a credit report, with a credit score, at the behest of creditors, landlords, utility companies, or mobile phone companies (they should ask your permission before doing so). Note, you’ll also want to be mindful of how many hard credit pulls are completed within a year.

How does it work? 

Your credit activity is reported to the various credit reporting companies mentioned previously where your data is maintained. Some activity may be reported to one or two bureaus, while other activity to all three. When the creditor (or lender, landlord, etc.) you are working with “pulls credit” from one (or all) of the credit bureaus they may use the FICO score as a way to better explain your risk profile. VantageScore is another credit score used for similar intent. The scores are models based on your related credit activity. 

Side-Note: To differentiate a little more, FICO has also provided a unique model for each of the bureaus, one that will reflect that unique attributes of that company. For example, mortgage lending uses FICO Score 2, 5, and 4. VantageScore uses one model for each credit reporting company (more on that, above). All that to say, at the end of the day, keep in mind your credit scores will likely be slightly different depending on your source.

Reason Codes, Score Factors, or Adverse Action Codes

When reviewing your personal credit report, for any of your two-digit codes from a credit report, there is a website to help understand what those codes mean. Rest easy – ReasonCode is there for your reference!

These codes are listed in order of the impact they had on your credit score, they can be used to personally identify what is holding you back in your score! Generic approaches will only get people so far, and understanding your individual credit report will help you target specific problems.

For me personally, I believe it is good idea to carefully review your credit reports each year to monitor usage and look for fraudulent activity.

How Long does it take to Build Credit? Bringing it All Together

Short answer: it depends! As we’ve seen in this post there are several variables impacting your score, each with different weighting. For someone with no credit, you’ll generally need at least 6 months of active credit usage to get a FICO score. Beyond that, it can take years, even decades to build-up to the highest score. 

Using the information we have from FICO and VantageScore, it is important to practice good financial habits. It also gives us an idea on where to start.

With that said, I like to break this up, into two paths. One is more broad and general in approach. The other is more specific to the individual and allows you to be more specific.

1. Practice good financial habits!

Start right away, or if you’ve had bad habits previously, start right now! Here are some ways to take control and start building good credit now.

Buying LESS than you can Afford

Poor money management could result in blowing through your budget, which could then quickly translate into missed credit card payments.

Credit cards are powerful. They can work for you, or they can really mess you up. Personally, I believe the decision to use credit cards should be very carefully evaluated and agreed upon by both spouses. Then, make sure to pay the statement balance in full and on time.

Payment History: Credit Card balances – Pay in Full if you Can!

As we’ve underscored, don’t miss payments, and make them on time. I recommend going a little further and paying off the balance in full each month. 

A credit card can be a slippery fish, and by not paying them off the interest accruals can start to hurt, and could eventually get away from you. For some peace of mind, I set mine to automatically pay the full statement balance each month. Take the guess work out!

Remember, this is a very important category! Something as simple as missing even one payment will hurt your score. 

Amounts Owed: Utilization and Ratios

This is another heavily weighted category, and one to watch carefully. In general, best practice is to use no more than 30% of your available credit. Easy enough, but one that you’ll have to watch. This is another reason why I recommend carefully monitoring and reviewing your credit each year.

Length of your Credit History: Don’t close your current Credit Cards

This was a mistake I made! Years ago, I closed my oldest credit card because I thought I wasn’t going to use it anymore and wanted to have “my main card” through a different company. Instead, I should have left it open, setup some recurring transactions, and auto-paid the full balance.

Credit Mix

Because the name is a little vague, this one can be confusing. The importance is to practice responsible credit usage for different types of credit. For example, think about credit cards, auto loans, mortgages, and student loans. They are different and responsible use in each area will help you in this category. 

Inquiries and New Credit: Don’t open a bunch of credit cards at once

Referencing the information from FICO and VantageScore, it is not a good idea to open a bunch of cards right now. Building your available credit could be a good idea for some, but the right mix and doing it overtime will likely be better for your score (compared to opening 3 or 4 right now). In the same line of thinking, too many credit inquiries could have an adverse effect on your score.

2. Target specific areas on your Credit Reports

For this part, as Step 2, I like to pull my three free credit reports each year and review any feedback (as well as check for fraud). From there, I like to use the feedback found on those reports to address any major issues with my credit.

If there aren’t any major corrections I need to take action on, sometimes it is just a cool-off period. For example, if had too many hard credit checks one year (buy a house, get an auto loan, and open a credit card) the only real option there is to wait for the cool-down to run, and avoid anymore.

Whatever your situation, be cautious, and dig deeper on your specific profile before signing up, applying, or otherwise taking on new credit or loans. Make sure this is the right move for you and your family!

In Closing

My friend, I hope you found this helpful and empowering in your financial journey! With an understanding of how various actions you take will impact your score, you are now better equipped and prepared. I wish you and your family the very best in your financial journey. Keep up the hard work, and keep cultivating Mêtis in your Money Matters!