What do spirits, cheeses and credit history have in common?
The old adage that age brings wisdom has long prevailed in finance. It’s even a recognized part of your creditworthiness, contributing to a major factor in your credit scores, but not in the way you might think.
You see, your actual age isn’t something that credit scoring models take into account. Instead, the scores incorporate the age of your credit history. In fact, many FICO scoring algorithms count the age of your credit history as 15% of your overall score.
But what makes a well aged credit history? Like most spirits, it is best to age, as long as conditions remain good. A short and satisfactory credit history is often better than a long and difficult one. Of course, there is such a thing that too much short of credit history no matter how pristine they are.
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You need six months of history to get a FICO® score
To start building a credit history, you need at least one credit account that reports your payment history and balance to at least one of the top three. credit bureaus: Equifax, Experian and TransUnion. But you don’t get a credit score right away.
The credit history requirement for a credit score varies by agency. As a base, you need at least six months of credit history to qualify for a FICO® score. VantageScore is a bit easier, as you only need a month of history to qualify for a VantageScore.
Aging well for better results
While six months is the minimum age before being fully noticeable, it is the lower end of the range – manner basically. Most lenders (and scoring models) consider less than two years of credit history to be little more than a good start.
When you get into the two to four year range, you simply remove the training wheels. Having at least five years of good credit history puts you in the middle of the pack. It is only when you have seven to ten years of strong credit history that you will achieve the highest scores for this credit factor.
Of course, it’s not just the age of your credit history that matters. This aspect of your credit score actually analyzes the age of your credit history in two different ways, and each weighs in the end product.
The age rating factor of your credit history has two parts
Having at least one old credit account in good standing shows lenders that you have a great deal of practice in maintaining your credit responsibly. But that’s not all there is to see. For example, having an old account and a dozen new ones can tell a whole different story. So creditors will look at both your overall history and the average age of your account to get the big picture.
1. Your overall credit history
This aspect of your score is pretty straightforward, as it just looks at your oldest account. This is a great reason to keep your first credit card. And it’s even better if it’s a no annual fee card that you can leave open at no cost.
However, if you close an old account, it won’t necessarily immediately hurt your credit history. Closed accounts in good standing can stay on your credit reports for up to 10 years.
2. The average age of your account
This part of your score examines the average age of your accounts, across all of your accounts. To determine the average age, you simply add the age of each account, then divide by the total number of accounts.
For example, suppose you have three credit cards, each with the following ages: Card A: 24 months, Card B: 12 months, Card C: 3 months. In total, you get a total of 39 months. Divide this total (39) by the number of cards (3), and you get an average age of: 39/3 = 13 months.
Each new credit card you open will be added to the mix, lowering the average age of your account. Too many new accounts can cause your average to drop significantly. Like your overall age, a higher average account age is preferable, so it’s a good idea to stagger your new apps to give your existing accounts more time to age between additions.
There are a lot of things that go into your credit scores
While the age of your accounts is an important part of your credit scores, it’s also important to remember that it’s just one of many factors that contribute to your scores. Time will age your credit history without much involvement on your part, so focus on the parts of your score that you can actively improve. Pay your bills on time, keep your balances low, and space your demands to keep your overall credit in good shape.