Your credit score is like a financial report card that tells lenders how reliable you are when it comes to paying your bills. If you’ve made a lot of mistakes, like failing to make payments on time or accumulating debt, your score will reflect that. But the other side is also true – responsible payment behavior will cause your credit score to rise again.
The time it takes to get a good credit score depends on where you start from, the type of negative information on your credit report, and how quickly you are able to pay off debt. While you can’t fix your balance overnight, you will notice your score rising over time if you work to pay off debt and make your payments on time.
Here’s what you need to know about how long it will take to repair your balance, and steps you can take to get started now.
What is a bad credit score and why is it important?
There are hundreds of credit scores, but the two most popular credit scoring models were created by FICO and VantageScore. FICO considers a credit score between 300 and 579 to be “poor,” while VantageScore considers a credit score to be between 500 and 600, according to the Experian credit bureau. Under the VantageScore model, a credit score between 300 and 499 is considered “extremely poor,” while FICO does not have a separate “extremely poor” category. Keep in mind that your score may also vary with each of the three consumer credit bureaus — Equifax, TransUnion, and Experian — who collect and report all information independently of each other.
Having a bad credit score can affect your life in many ways. “Anytime you apply for a mortgage, car loan, or any lease agreement, it will affect your payments,” says Jessica Weaver, CFP, CDFA, CFS, and author of Confessions of a Money Queen..“ Weaver adds that bad credit can even affect employment and housing. Some employers check your credit score during the hiring process, and landlords use your credit score to determine if you qualify to hire.
A loan or credit card may be denied outright if you have bad credit, says Nathan Grant, senior credit industry analyst at Credit Card Insider. Even if you are approved, he adds, “you’ll get worse financing terms you can get and lower credit limits.” Bad credit can also affect your insurance rates.
In general, bad credit can make your life more expensive, Weaver says. People under budgetary pressures need to be especially careful about maintaining good credit to avoid unsustainable financing options.
What leads to bad credit?
Your credit score is a reflection of your credit history, and any pejorative marks on your credit report can lower your score. These include:
- Late or missed payments: Your payment history is the most important factor in determining your score, and payment delays remain on your credit report for seven years.
- charged accounts: This happens when the credit card issuer closes your account for non-payment and you still owe the balance. It’s one of the worst degrading signs you can get.
- Accounts in collections: If you fail to make payments and the lender or issuer sells your debt to a third-party collector, this account status will show up on your credit report and cause your score to drop.
- Loan default: If you fail to repay the loan, it will damage your credit significantly.
- bankruptcy: Bankruptcies take longer to recover from. Chapter 13 bankruptcy stays on your credit report for 7 years, and Chapter 7 bankruptcy stays for up to 10 years.
- home foreclosure: If you default on your mortgage payments, the lender may foreclose on your home, which will hurt your credit even more.
- high balances or Maximum cards reached: Having a high percentage of credit use, or using a large percentage of your available credit, will have a negative impact on your score. Try to keep your credit utilization ratio below 30%, if possible.
- Closing credit cards: Closing old cards will shorten the life of your credit history, and closing a card with a high limit will increase your credit utilization. Both can negatively affect your score. You should only consider canceling a credit card if it has an annual fee and you are no longer using it.
- Apply for too many cards or loans in a short period: Applying for new credit causes a small, temporary drop in your credit. Getting a new card every two years will not be a problem, but if you apply for one card after another, it will hurt your score.
You can check your credit report for free every year at AnnualCreditReport.com, the only source authorized by federal law to provide free credit reports from each of the three credit bureaus.
How often is your credit score updated?
Your credit score is based on the information on your credit report. When something changes on your credit report, that’s when your credit score is usually recalculated, Grant says.
Your credit card company typically updates the credit bureaus once per month with your account details, consistent with each new credit card statement, he adds. Therefore, if you are working on improving your credit, it is a good idea to check your score on a monthly basis.
How long does it take to repair or rebuild your credit?
“It’s often possible to get a higher credit score in 30 days or less,” says Grant, but don’t expect your credit score to go from fair to excellent during that time. If you’ve had a major setback, it usually takes one to two years to repair your credit, according to Weaver.
But this depends on your individual situation. For example, FICO research shows that it takes about five to ten years to recover from bankruptcy, depending on your credit score. If you are 30 days late on your mortgage payment, you can fix your balance in about 9 months to three years. The higher your score initially, the longer it will take to fully recover from the setback.
The credit repair process should begin as soon as possible so that you are ready the next time you need to apply for new credit. “If you’re in the process of buying a home, buying a new car, or starting a business, after six months to a year, start reviewing your grades and report,” Weaver says.
The fastest way to improve your credit score
Although repairing your credit score takes time, there are some steps you can take to speed up the process:
- Solve errors in your report: If you notice errors on your credit report, such as incorrect balances or accounts that don’t belong to you, objecting to these errors and removing them from your credit report can quickly improve your credit score.
- Request a credit limit increase: Depending on your issuer, you may be able to request a credit limit increase online. You can also contact customer service. If you’ve made payments on time but are using too much of your available credit each month, this could be a way to lower your credit utilization and improve your score.
- Debt repayment: Paying off debt is another effective way to improve your credit score. “Immediately prioritize paying as much as you can afford into your budget while avoiding any late payments,” Grant says. A popular strategy is the debt avalanche method, which involves dealing with the higher interest credit cards first.
- Make payments on time: The more you can maintain consistent payments on time, the more you will notice an improvement in your score. If you tend to be forgetful, set up automatic payments – just make sure you keep a budget and have enough in your bank account to cover the fees, so you don’t run into overdrafts or reimbursed fees.
- Change your spending habits: If you find yourself in a cycle of debt and it’s not affecting your balances, take a step back and look at your money and spending as a whole, says Weaver. “Stop adding to this credit card while it’s paid off,” she says. Use the cash-based budgeting system while you are in control of your money. Once you’ve paid off your debt, you can focus on using your credit cards responsibly so you’re never in trouble again.