A strong credit history plays a crucial role in achieving financial goals, from securing a mortgage to getting approved for a personal loan. Understanding how the length of credit history affects your credit score can help you manage your credit more effectively.
In this article, we will explore the concept of credit history, how it’s calculated, its impact on your credit score, and strategies for improving it.
What is your length of credit history?
The length of credit history refers to the amount of time you’ve had active credit accounts. This information is collected by credit bureaus and documented in your credit report.
The longer your credit history, the more information lenders have to assess your creditworthiness, which can lead to better credit scores and more favorable loan terms.
How is the length of your credit history calculated?
To calculate the length of your credit history, several key factors are considered:
- Age of oldest account: The length of time since your oldest credit account was opened.
- Age of newest account: The length of time since your newest credit account was opened.
- Average age of all accounts: The combined ages of all your credit accounts divided by the total number of accounts.
These aspects collectively provide an understanding of how long you’ve been managing credit accounts. They are integral in evaluating your experience and reliability in handling credit, which can be a factor in assessing your creditworthiness.
How does length of credit history affect your credit score?
The length of credit history impacts your credit score in several ways. Both FICO and VantageScore credit scoring models consider the age of your credit accounts as a significant factor in determining your score.
A longer credit history usually results in a better credit score because it demonstrates that you have experience managing credit and making on-time payments. Additionally, a long credit history with a variety of credit types—such as credit cards, mortgages, and auto loans—shows that you can handle different types of credit responsibly.
What is a good length of credit history?
There is no specific “good” length of credit history, since the ideal length depends on individual circumstances and financial goals. Generally, the longer it is, the better because it provides lenders with more information about your credit management habits. However, even those with shorter credit histories can still achieve good credit scores by maintaining a strong payment history, low credit utilization ratio, and a diverse credit mix.
How long of a credit history do you need?
The minimum length of credit history required for a credit score altogether varies depending on the scoring model. For example, FICO requires a minimum of six months of credit history, while VantageScore requires only one month. However, it’s essential to understand that a longer credit history is typically more beneficial when pursuing significant financial goals, such as obtaining a mortgage or auto loan.
What happens when you close a credit account?
Closing a credit account can have both short-term and long-term effects on your credit scores. In the short term, closing an account may decrease your available credit limit, which can increase your credit utilization ratio and negatively impact your credit score.
In the long term, closed accounts will eventually drop off your credit report, potentially reducing the length of your credit history and affecting your credit score.
Does closing a credit card hurt your score?
Closing a credit card account can hurt your credit score by reducing your available credit and potentially increasing your credit utilization ratio. To minimize the negative effects of closing a credit card, consider paying down balances on other cards or asking for a credit limit increase on your remaining cards. Alternatively, you can keep the card open and use it for small purchases to maintain an active account.
How to Improve Your Length of Credit History
There are several strategies to help build and maintain a longer credit history:
- Keep accounts open and active: Avoid closing old or unused credit accounts, as doing so may reduce your credit age. Keep accounts in good standing by making small, regular purchases and paying them off in full each month.
- Become an authorized user: If you have a family member or close friend with a strong credit history, ask if they would be willing to add you as an authorized user on one of their credit card accounts. This can help you establish or strengthen your credit history, as the primary account holder’s positive credit behavior will be reflected on your credit report.
- Diversify credit types: Aim to have a mix of different types of credit accounts, such as credit cards, auto loans, and mortgages. This not only demonstrates your ability to manage various types of credit, but also increases the length of your credit history.
- Consider a credit builder loan: A credit builder loan is a type of installment loan designed to help individuals build credit. These loans are usually offered by financial institutions like credit unions and community banks. By making on-time payments toward a credit builder loan, you can establish a positive payment history and build your credit over time.
- Secured credit cards: Apply for a secured credit card, which requires a security deposit that serves as your credit limit. By using the secured card responsibly and making your payments on-time, you can establish or improve your credit over time. After demonstrating consistent positive credit behavior, you may be able to upgrade to an unsecured credit card and have your deposit refunded.
- Monitor your credit report: Obtain a free credit report from each of the major credit bureaus annually to ensure your credit reports are accurate and up-to-date. If you notice any errors or discrepancies, dispute them promptly.
What other factors affect your credit scores?
In addition to the length of credit history, several other factors contribute to your FICO score:
- Payment history: Your record of on-time payments is the most critical factor impacting your FICO score. Consistently paying your bills on time demonstrates responsible credit management and helps improve your credit scores.
- Credit utilization: Maintaining a low credit utilization ratio (the percentage of your available credit that you’re using) is essential for good credit scores. Aim to keep it below 30% to avoid negatively impacting your scores.
- Types of credit in use: A diverse credit mix, which includes various credit types, can positively affect your credit scores, demonstrating your ability to manage multiple types of credit responsibly.
- New credit inquiries: Applying for several new credit accounts in a short period can negatively impact your credit scores, as it may indicate a higher level of risk to lenders. Limit the number of hard credit inquiries to maintain a strong FICO score.
- Public records and collections: Bankruptcies, judgments, and collection accounts can significantly hurt your credit scores. It’s crucial to address and resolve any negative public records or collections to boost your credit score.
Understanding how the length of credit history impacts your credit score is crucial for managing your credit effectively. By maintaining a strong payment history, low debt-to-credit ratio, diverse credit mix, and a long credit history, you can achieve better credit scores and secure more favorable loan terms. Taking control of your credit is a vital step toward financial success.