"How long does it take to build credit?" is a more complicated question than it may seem. Specifically, the length of time it takes to build good credit and the length of time it takes to build great credit are two completely different things. Great credit is the result of years of financial responsibility, while good credit can actually be achieved faster than you might think, especially if you're starting from scratch.
How credit scoring works
There are several different types of credit scores out there, but the FICO scoring model is by far the most common -- used in more than 90% of lending decisions. So, we'll focus on the FICO score, but be aware that there are other scoring models as well.
The FICO score is made up of five distinct categories of information, and each one has a different weight assigned to it. Scores range from 300-850, and higher scores are better. In general, a score of 750 or greater is considered to be excellent credit, although this varies depending on who you ask. Scores above 620 are generally considered to be good, but again, there is no specific score that is considered to be "good" credit.
Your FICO score is made up of the following categories of information:
- Payment history -- 35%
- Amounts owed -- 30%
- Length of credit history -- 15%
- Types of credit used -- 10%
- New credit -- 10%
Not all of the categories are as straightforward as they seem, so let's take a look at how each one affects your ability to build credit.
Which categories let you build credit quickly?
Three of the five categories allow you to build credit relatively quickly -- amounts owed, length of credit history, and new credit.
Most significantly, "amounts owed" refers more to how much of your available credit you use, as opposed to the actual dollar amounts you owe. So, by opening credit accounts and keeping your balance at a relatively low percentage of your credit limits (experts generally recommend 30% or less), you can obtain a strong contribution from this category.
The primary focus of "types of credit used" is whether or not you have a healthy mix of active credit accounts, such as mortgages, auto loans, credit cards, and other types. This demonstrates the ability to handle different kinds of credit, and doesn't have to take a long time to maximize. I understand that people who are just establishing credit don't usually get accounts like mortgages, but you could still get a healthy mix through other types of loans.
Finally, the "new credit" category does suffer from opening too many new credit accounts within a short period of time, but as long as you only open one or two new accounts each year, your score shouldn't suffer much. A big part of the new credit category is the amount of recent inquiries you've had, which indicates the number of times you've applied for credit. Only the inquiries from the past 12 months factor into your score, so it doesn't take long after opening your first accounts for this to be all clear.
To sum it up, 50% of your credit score is made up of information that isn't too time-dependent -- meaning that it doesn't take years and years for these categories to have a strong positive impact on your FICO score.
Truly great credit takes time
Unfortunately for people just starting to establish credit, some of the FICO categories take years to truly maximize. For example, the largest category in the FICO formula (payment history) takes your last seven years of payment history into account. So, if your oldest account is just one year old, obviously this category won't be as maxed-out as it could be. However, you can establish a "good" payment history in a pretty short period of time by simply paying your newly established accounts on time.
And most obviously, the "length of credit history" category is impossible to maximize in a short amount of time. This considers the age of your oldest account, the average age of all of your accounts, and the ages of each individual account on your credit report. So as you can probably imagine, to ace this category takes many years.
How "good" do you need your credit to be?
According to myFICO.com, in order to qualify for the best interest rates on mortgage and auto loans, you'll need credit scores of 760 and 720, respectively, but you can qualify for a mortgage or auto loan with scores significantly lower than these. Your interest rate will be a little higher than those folks with excellent credit scores, but while you might have to pay a little more to borrow money on the road to excellent credit, keep in mind that building a great credit history takes two things -- time and participation.