Building credit from a low score of 500 to a good score of 700 is a challenging but achievable goal. It requires dedication, patience, and a plan. With the right approach, you can improve your credit score in as little as 12 to 18 months. The first step is to understand how credit works and what factors influence your credit score.
Your credit score is determined by five main factors: payment history, credit utilization, length of credit history, types of credit used, and new credit inquiries. Payment history is the most important factor in determining your credit score. Paying your bills on time and in full each month will help you build a positive payment history and improve your credit score. Credit utilization is the second most important factor in determining your credit score.
This is the amount of debt you have compared to the amount of available credit you have. Keeping your credit utilization ratio below 30% will help you maintain a good credit score. The length of your credit history is also important. The longer you have been using credit responsibly, the better your score will be.
The types of credit you use also affect your score. Having a mix of different types of accounts, such as installment loans and revolving accounts, can help you build a good credit score. Finally, new credit inquiries can have an impact on your score. Applying for too many new accounts in a short period of time can lower your score. Once you understand how these factors affect your credit score, you can start taking steps to improve it. One way to do this is to open a secured credit card.
Secured cards require a deposit that acts as collateral for the card issuer, reducing the risk for them and allowing them to issue cards to borrowers with bad or no credit. You can also add an authorized user to one of your existing accounts. This will help build their credit while not affecting yours. If you have a friend or family member with great credit who is willing to add you as an authorized user on one of their accounts, that can really help boost your score quickly. You can also take out a personal loan or car loan to add new types of debt to your profile and increase your credit score. Once you open a new account or take out a loan, it will take 30 to 45 days for the account to be reported to the credit bureaus and for your score to start improving. It usually takes 3 to 6 months of account activity before you see an improvement. If you are diligent about making payments on time and keeping your utilization ratio low, you may be able to improve your score by 100-150 points in 90 days. If you have just come out of bankruptcy and your score is 450, it may take longer. Finally, it's important to remember that maintaining a good credit score is just as important as building one.
Once you reach 700, make sure you continue making payments on time and keeping your utilization ratio low so that you can maintain that good score.