Know Your Credit Score: Length of Credit History
In this five-part series, we’re breaking down the different categories that make up your credit score. Today we’re talking about Length of Credit History.
The length of your credit history is pretty self-explanatory: it measures how long you’ve been using credit. Lenders like to know this because, for the most part, the longer you’ve been using credit, the more reliable a borrower you will be.
It’s not like this is a major factor in your score. In fact, it only makes up 15 percent of your total. Compare that to your payment history (35 percent) and your amounts owed (30 percent), which together make up a whopping 65 percent your overall score.
But just because the length of your credit history is a smaller factor, that doesn’t mean it’s not important. (Hot tip: there are only five factors that make up your credit score, so all of them are pretty important.)
Here’s what you need to know.
How does the length of your credit history work?
- The dates you opened each of your credit accounts.”
- “The time that has elapsed since the last activity on each account.”
- The specific type of credit accounts opened (e.g., credit card, loans, etc.).”
But how are all of these factors used to calculate this portion of your score? Well, there’s a couple of different ways.
First of all, you have to have at least some kind of recent activity.
“To have this factor counted in the calculation of your credit scores you need to have activity on at least one of your accounts the past six months that is reported to a credit reporting bureau,” says Lesavich.
He adds that “The length of credit history factor is determined with the ages of your newest and oldest accounts, along with the average age of all your accounts.”
And what about accounts that you’ve had in the past but that you’ve since closed out?
It depends on another factor: your payment history.
According to Lesavich, “Closed accounts in which all payments were paid on time remain on your credit report for 10 years from the date of last payment or the date of closure.”
Meanwhile, he says that “Closed accounts with late payments remain on your credit report for 7 years from the date of the first late payment.”
You’ll need six months of credit-use to establish a credit score.
One of the important things to remember about the length of your credit history is that, without it, you cannot actually have a credit score.
Even though your credit history is only 15 percent of your score, the company that’s making the calculation (likely FICO or one of the three credit bureaus) needs info from all five categories to create your score in the first place.
And remember, it takes a minimum of six months to establish a viable credit history.
“If a consumer is trying to establish credit and obtained a single credit card 3 months ago, with no other loans, then he/she would not have a credit score because there would be no length of history component to use in the credit score calculation,” says Lesavich.
Your score could also be impacted if you’ve gone a long time without using any credit.
“If a consumer has not used any of their credit accounts for a long time period, such as several years, because they are paying cash for everything and/or they have paid off everything,” says Lesavich, “then such a consumer also would not have a credit score because there would be no length of history component to use in the credit score calculation. This will hurt such a consumer because if they need to borrow money they will be deemed to have ‘no credit.’”
So make sure that you’re staying active on the credit accounts that you already have open. Make your payments, and make them on time!
And if you’ve never used credit before, then it might be a good idea to apply for a secured credit card. These are cards that use a cash deposit to establish your credit limit and to serve as collateral.
You can usually get one of these without a credit check and many secured credit card companies report payment information to the credit bureaus. They can be a great way to establish your credit history.
Closing an old credit account? Not so fast.
“Be careful closing your oldest account or credit card,” says Lesavich. “If you do so you will likely lower your credit score at some point.”
Confused? Let him explain:
“For example, assume the consumer has three credit cards and no other loans. The credit card accounts were opened 15, three and two years ago.
“The consumer decides to close the credit card account opened 15 years ago because the interest rate is too high, they no longer use the card, they are going to transfer the balance to a zero interest card, etc.
The consumer then has an “oldest account” of three years and not 15 years.”
You see what happened there? By closing their oldest account, that (hypothetical) person sacrificed all that credit history that they had built up with it.
Now, one of the dangers of keeping old credit lines open is that you might be tempted to use them, which only put you further into debt! That’s why, if you keep the account open, you should make sure you don’t have easy access to it.
Closing an old card might also affect another important factor of your score, your credit utilization, which is a major part of your “amounts owed.”
“Credit utilization is a ratio of how much debt you owe to how much credit you have available to you,” says Lesavich. A low ratio, i.e., not much debt but a lot of available credit, is considered most desirable. Credit utilization scores are typically calculated in two parts, using two different calculations. If your credit utilization score for either part exceeds a pre-determined threshold, your credit score will go down.”
According to Lesavich, the “first calculation is done for an individual credit utilization score that is calculated separately for each of your credit cards,” while the “second calculation is done for an aggregate credit utilization score that is calculated for your total balances on all your credit cards against your total credit limits for all cards.”
So here’s how it breaks down: closing an old credit card will reduce the total amount of credit you have available to you, which will increase the ratio for your aggregate credit utilization and potentially lower your score.
What can you do to improve the length of your credit history?
This might come as a shock to you, but the best way to improve your credit history is to keep using credit.
The longer you keep making payments on your loans and credit cards–as well as opening new accounts, when appropriate–the longer your credit history will become and the more it will help your score.
Of course, if you’re routinely making late payments and overdrawing your accounts, then that longer credit history won’t really help your score. So don’t do that. The same goes for taking out bad credit loans and no credit check loans. Those lenders don’t report payment information to the credit bureaus, so they won’t do your score any good.
You should also try to keep your old accounts open, especially if you never use them or use them only rarely. While it might seem tempting to close those old cards when you open up new ones, it can have the opposite effect.
Think about it the same way you would think about dating. Whose advice are you going to trust? The person who just got into a relationship three months ago, or the person who’s been happily married for 15 years?
When you think about it like that, the answer is pretty obvious.
|Stephen Lesavich, Ph.D., JD, (@SLesavich) is an attorney, credit card expert, award-winning and best-selling author of “The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards”.|