How Length of Credit History Affects Your Credit Score
You probably studied history in school — topics ranging from ancient Greece to World War II. The one subject your teachers shouldn’t have skipped over? Your credit history.
Let’s start at the top. You have a credit score. That score influences the amount of credit and the terms that lenders may offer. What determines your score? Your payment history (35% of your score), amounts owed (30%), amount of new credit (10%), and mix of credit (10%) are taken into consideration. Then there’s your credit history, which refers to how long you’ve been using credit and accounts for 15% of your score.
How length of credit history is calculated
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 vs. revolving).
- The length of time since those accounts have been used.
All of this information is stored in your credit reports. FICO’s scoring formula for length of credit history also includes your Average Age of Accounts (AAoA). You can divide your oldest and newest accounts by your total number of accounts to find your AAoA.
How length of credit history affects your overall credit score
Let’s get into the nitty-gritty. Why does the length of your credit history matter? Like many things in life, consistency is key, and the age of your credit history reflects that. A few reasons the length of your credit history matter are:
- A longer credit history provides evidence to potential creditors that you pay back your debts and are reliable.
- Creditors can use your credit history length to gauge how frequently you open and close accounts.
The myth of closing unused or underutilized accounts
It can be tempting to close accounts you no longer use, especially if they charge fees. We’ve all been warned before that closing accounts can harm credit scores, but is it really that detrimental to close an account? Closing accounts can damage your score, but not always. A few good rules of thumb when considering closing an account:
- If possible, keep your older accounts open as they help establish your credit history.
- Don’t close out credit card accounts if it means transferring the balances will take up more than 35% of your available limit on a single card.
- Keeping a mix of accounts is a factor in your score, so make sure you don’t, for example, close your only revolving credit account.
- Accounts with high credit limits but low balances help establish strong credit.
As long as the accounts you want to close aren’t your oldest accounts, closing accounts with high annual fees or interest rates will save you money and not cause too much damage to your score.
For those who have no credit history
You aren’t born with a credit history, which means you won’t have the credit score needed to actually get credit from lenders until you begin to establish a credit history. It’s a bit of a chicken and egg situation: You need credit to get credit.
If you have no credit history either because of age or due to not utilizing credit in the past, there are small steps you can take to build a credit score:
- Secured credit cards. A traditional credit card may be difficult to get when you don’t have a long credit history, but a secured credit card may be easier to obtain. These types of credit cards are secured by an upfront deposit that is held in a special savings account, with a limit that is the same as the amount in your account. Not all lenders report secured credit cards to credit reporting companies (these reports are what affect your credit score), but responsibly using this type of card may help you qualify for a traditional credit card through the same lender.
- Credit builder loans. Similar to a secured credit card, you can obtain a credit builder loan. For this type of loan, you deposit money into an interest-bearing bank account and borrow against the deposited amount.
- Become an authorized user. If a family member or partner with good credit will allow you to become a joint member on one of their accounts, you will be able to build your credit history with the on-time payments made on the account. However, if the account is not paid on time, both parties will feel their credit scores impacted.
The bottom line
Building a credit history takes time — there’s no way around it. Having a shorter credit history doesn’t mean you can’t have a good credit score, but the longer you’ve had a high-ranking score, the better. Lenders see a long, consistent credit history as an indicator you’ll pay them back. By paying your bills, credit card debts, and loan payments on time, you can work toward building a longer and stronger credit history.