Your credit score isn’t quite where you want it to be, and you want to raise it fast. So, what’s the best way to reach your target score? It depends on your credit profile and timeline. Read on to discover why it’s important to boost your score, which factors are used to generate the three-digit number and how long it takes to improve your credit score. You’ll also learn more about the fastest ways to build credit.
The Importance of Building Your Credit
Credit impacts many areas of your life, so it’s vital that you build a solid foundation from scratch or work towards repairing your credit health if you already have a score that’s on the lower end. Here’s a closer look at the reasons why building credit is important:
- Your credit score determines how much you’ll pay for debt products, including credit cards, personal loans, student loans, auto loans and mortgages. (Note: The most favorable financing terms are generally reserved for borrowers with good or excellent credit. You could be approved with bad credit and pay more in interest, but the lender or creditor may also decide to deny your application if they determine that your risk of defaulting on payments is too high).
- You could be denied employment in select industries if your credit history is unfavorable.
- You could be assessed higher insurance premiums if you live in a state where providers are allowed to use credit-based insurance scores to assess risk.
- You could be turned down by landlords for rental housing or asked to make a higher security deposit if your credit score is low.
- Your required deposits for utilities and cell phone service could be higher if your credit score isn’t up to par.
What Factors Have an Impact on Your Credit?
It varies by credit scoring model. The two most prevalent models are FICO and VantageScore. The FICO score is used by 90 percent of lenders and creditors to make a lending decision and is calculated as follows:
- Payment history: 35 percent of your FICO score
- Amounts owed: 30 percent of your FICO score
- Length of credit history: 15 percent of your FICO score
- Credit mix: 10 percent of your FICO score
- New credit: 10 percent of your FICO score
VantageScore isn’t as prevalent but is slowly rising in popularity. Here’s a breakdown of the formula used to compute your VantageScore:
- Total balance, credit usage and available credit: extremely influential
- Credit mix and experience: highly influential
- Payment history: moderately influential
- Credit age: less influential
- New accounts: less influential
How Long Does It Usually Take to Build Credit?
It depends on your credit history. If your score is on the lower end, though, you’re more likely to see an increase much sooner than you would if you have an established credit history and a good or excellent credit score. Keep in mind that simply reducing the balances on your revolving credit accounts, making timely payments, and increasing credit limits on existing accounts could boost your score quickly. In addition, lenders and creditors typically report to the credit bureaus every 30 days, which means you could start seeing results as soon as your accounts are updated.
Fastest Ways to Build Your Credit
When you’re ready to start improving your credit score, follow these strategies to help you achieve your goals.
Pay All Your Bills on Time
Payment history is the most significant component of your FICO score. A single late payment can drop your credit score by up to 100 points – the higher your score before the late payment appears on the credit report, the greater the impact. So, it’s important to pay all your bills on time. And if you struggle to keep up with payment due dates, consider automating monthly payments to avoid falling behind.
Keep in mind that late payments typically aren’t reported until your account is 30 days past due. Therefore, you could incur a late fee from the creditor if you pay after the due date. Still, you’ll have an ample amount of time to reach out and request a payment arrangement or extension to prevent adverse credit reporting if you’re experiencing financial hardship. Some will even waive the late payment fee if it’s a first-time occurrence.
Reduce Your Existing Debt
The second most important factor in the FICO score calculation is the amount you owe creditors, mainly on revolving accounts. Ideally, your credit utilization rate on credit cards should be 30 percent or lower to give yourself the best chance at building a strong credit score. If you can get this percentage to 10 percent or lower, your score could improve even more.
To illustrate, assume you have three credit cards with $1,000 limits. If you owe $700 on two cards and $600 and the other one, your credit utilization rate is 66.67% ($2,000 / $3,000). In this case, you’d need to bring your total balance on all three credit cards down to $900 or lower to reach that target utilization rate of 30 percent.
Request for Limit Increase
You can also request credit limit increases to lower your credit utilization ratio. This approach is ideal if you don’t have a ton of cash lying around to pay down your balances and you’re disciplined enough not to run up the balances if you’re approved for an increase.
Be mindful that some credit card issuers will run a hard credit check to determine if you’re eligible for an increase. This could drop your credit score by two to five points. So, start with credit card issuers who only use soft credit checks when requesting limit increases.
Become an Authorized User
When you become an authorized user, you’re added to the account, and the history appears on your credit report. However, you’re not on the hook for the amount owed, even if the primary cardholder gives you a credit card to use.
For this strategy to be effective, you should only request to be added to a friend or relative’s credit card account if the payment history is pristine and the utilization rate is low. Otherwise, your credit score could take a dip. Also, know that you can request to be removed from the account as an authorized user at any time.
Correct Any Errors on Your Credit Report
Visit AnnualCreditReport.com and retrieve a free copy of your credit report from the three primary credit bureaus – Experian, TransUnion and Equifax. Review each page of the reports and highlight or circle any errors or outdated information.
File disputes promptly with the appropriate credit reporting agencies to have the issues rectified. Otherwise, incorrect data that could be dragging your credit score down will continue to be reported.
Get a Secured or Credit-building Loan
Secured credit cards and credit builder loans are other effective ways to build your credit score. Both allow you to improve your payment history, but it could take some time for you to see results. Furthermore, you may need to make a hefty security deposit to obtain a secured credit card, but this isn’t always the case with credit builder loans.
