Like a fine wine, the older your credit history, the better impression it can make. Although the length of your credit history determines only 15% of your FICO® Score, it can affect your chances of getting a loan.
What is “Length of Credit History”?
The length of your credit history is broken down into three parts:
- How long each of your accounts has been open
- How long specific account “types” have been open (installment revolving)
- The length of time since those accounts have been used
To find these three items in one place you need to look no further than your credit reports. Within your reports (Experian, Equifax and Transunion), there’s a listing of all your accounts, the type of account, the date each was opened, and the last time you used each account.
FICO’s formula for helping to determine your Length of Credit History also includes the Average Age of Accounts (AAoA). This number is calculated using your oldest and newest accounts divided by your total number of accounts. As a matter of fact, you can use the information found on your credit report to calculate your AAoA on your own and see where you fit on the Length of Credit History spectrum.
How AAoA affects your credit score.
Very often, Length of Credit History comes into play when it’s cross-connected with two other credit score factors: Payment History and New Accounts. For instance, if you miss a credit card payment (or two), it could have more of an impact on your FICO® Score if you have a shorter credit history. On the other hand, if you have a very long history showing consistently on-time payments and miss a mortgage payment or open a new account, the damage to your score could be less.
Although there are instances in which individuals with newer credit have very high FICO® Scores (typically due to the excellent performance of other credit score factors), typically those with a longer Length of Credit History have higher FICO® Scores than those with shorter histories. Does that mean in order to maintain that history you should never close any accounts? Or does it matter?
Closing an account and credit history – the connection.
A common misconception by many is that closing one or more accounts will increase one’s credit score. That logic assumes that the fewer the accounts one shows on one’s credit reports, the better a person’s chances for an improved credit score.
Yes, there are times when closing an account can help your score. For instance, if you’re consistently maxing out a certain card, paying an exorbitant interest rate or your credit card’s annual fee costs more than a monthly car payment, canceling that card is probably your best option. Initially, your score could get hit by a few points, but nothing compared to missing a payment or narrowing your credit utilization ratio (the amount you owe compared to your credit limit).
Remember that when you close an account, that account will eventually be removed from your credit report. If it was an older account, your Length of Credit History will suffer, which in turn will have a negative impact on your credit score. Also, keep in mind when you close an account and your credit utilization ratio increases, you could hurt your score.
Think about it this way:
CREDIT CARD 1: 0 balance and a $15,000 limit.
CREDIT CARD 2: $5,000 balance and a $10,000 limit.
Credit Utilization = 20% ($5,000 balance divided by a total limit of $25,000)
You decide to close CREDIT CARD 1 account because you don’t use the card.
Credit Utilization = 50% ($5,000 divided by a total limit of $10,000).
What if you have NO credit history?
No credit history means no (or a very low) credit score. So if no one will give you credit because you don’t have past credit, how are you ever supposed to develop a credit history?
Some creditors offer a “secured” credit card. Here’s how it works: you open a credit card account backed by a cash deposit. The amount you deposit will be equal to your credit limit. If you don’t pay your monthly bill, the creditor can take the money from your original deposit (no risk for the issuer). If you pay your bill on time each month, you can eventually get your money back and possibly qualify for an “unsecured” card which doesn’t require a deposit. This helps put you on the road to a positive credit history.
Other creditors and/or banks provide credit-building loans. The money you “borrow” is deposited into a savings account that you can’t access until you have fully repaid the loan. Once the loan has been paid by you as agreed, the creditor will send a positive report to the credit bureaus. No risk for the creditor and the start of a strong credit history for you – a win-win situation. Plus, there are other ways to create a credit history that might even work better for you.
Check out myFICO forums to see how others have used Length of Credit History to their advantage!