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How your FICO credit score is calculated: Length of credit history

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This is the third of a five-part series examining what goes in to creating your FICO credit score -- the three-digit number that helps determine how much you can borrow and on what terms. Each part of the series will take an in-depth look at one of the five basic components of the credit scoring model. Today: length of credit history. 

In the world of the FICO credit score, age and experience trump youth and enthusiasm.

To earn a FICO credit score, borrowers need to have at least some credit history. Although it's not the most heavily weighted factor used to calculate a borrower's FICO score, the length of a borrower's credit history does matter. And within that component, age and experience typically proves beneficial.


"Generally, the older your length of credit history, the better it is for your FICO score," says Barry Paperno, consumer operations manager for myFICO.com.  

Credit scores are used by lenders -- including credit card issuers and mortgage lenders -- to predict the risk of a borrower not repaying their loans. There are many credit scores available, but it's the FICO score that gets the most frequent use by lenders. As a result, to improve their ability to qualify for low interest credit, borrowers will want to improve their FICO scores.  

To calculate its score, FICO looks at five differently weighted factors:

1. How you've handled credit (otherwise known as your payment history).
2.
How much total debt you have.
3.
How long you've had credit.
4.
How much new credit you have.
5.
What types of credit you have.

Accounting for 15 percent of a FICO score, "length of credit history" falls squarely in the middle of those five factors in terms of its importance.  

There's a saying in the credit industry: "The best credit is old credit." According to a study by risk management firm SubscriberWise, consumers with perfect 850 FICO scores have an average age of 61 years old (born in 1950). Even the very youngest people to achieve a top FICO score had a touch of gray -- they were born in 1967. And on average, those perfect borrowers had their first credit report created 30 years ago.

"For those obsessed with achieving the perfect FICO score, at least one fact profoundly demonstrated with our data is that an individual must have a long and well established credit history to have even a remote possibility of reaching an 850," SubscriberWise President David Howe said in a company press release.  

But even if your history isn't perfect, it's still important to have one. "It's better to have some sort of credit history -- even if there have been some problems -- rather than no credit history," says Andrew Bernstein, a certified personal finance counselor with DebtHelper.com, a West Palm Beach, Fla.,-based credit counseling agency. That's because without a credit history, banks don't know what kind of borrower you'll be in the future. And when banks are uncertain, that usually means higher interest rates for borrowers -- if they can get a loan at all.

History in the making
FICO breaks down "length of credit history" into three pieces:

  • How long accounts have been open.
  • How long specific account types have been open.
  • How long it's been since those accounts were used.

"When considering 'length of credit history,' the FICO scoring formula evaluates the ages of your oldest and newest accounts, along with the average age of all your accounts," Paperno says.

So how much history is enough history? "The minimum amount of credit history needed to generate a FICO score is six months or more on at least one credit account," says Paperno. "There also has to be at least one undisputed account reported to the credit reporting agency within the past six months to generate a FICO score. These scoring requirements can be met by a single account or multiple accounts." That means a consumer who opened her first credit card three months ago -- and had no other loans -- would not yet have a FICO score, regardless of how responsible she has been with that card. 

Although accounts don't need to be open, they do need to still appear on your credit report to be counted by FICO. So even if an account was closed five years ago, for example, its continued appearance on a credit report would help extend a borrower's length of credit. Those closed accounts won't appear indefinitely, however: Closed accounts that were always paid on time remain on credit reports for 10 years from the date of closure or last account update, while accounts with late payments remain for seven years from the date of first delinquency.

That means if you haven't used credit in years, you may not have a FICO score. Alison O. in Vero Beach, Fla., (who asked that her last name not be included for privacy reasons) for example, recently learned that she no longer had a FICO score. Alison hadn't borrowed in years. The experience of having her identity stolen by her husband -- then going through a divorce and declaring bankruptcy in 1996 -- left her with a distate for debt. "It put me off any kind of borrowing," she says. She later remarried, paid off her car loan and bought a new home with cash. When Alison and her new husband eventually decided to finance partially the purchase of a small boat, the loan officer was surprised to see Alison had no credit score. "That's when we found out I didn't have any FICO score -- it's nonexistent," she says. "I don't have bad credit, I have no credit."

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Although the loan officer agreed to use the boat as collateral and finally approved the loan, Alison learned a lesson about credit scoring. "The fact that I own a house, have a job and pay my utilities on time doesn't add up to a FICO score," she says.

How do you build credit with no credit?
For consumers with no record of credit accounts, there's a Catch-22: They don't have a FICO score because they don't have a credit history -- and they may have trouble building a credit history without a FICO score. Consumers who recently experienced bankruptcy or another damaging event could likewise find their lowered credit scores make it difficult to open new accounts in order to rebuild their credit history.

So what should they do? Bernstein recommends starting out with a secured credit card, which requires a deposit as collateral to secure the card's line of credit. Secured cards, because they require you to deposit money, are easier to obtain than a regular unsecured credit card. Consumers need to check that the secured card's issuer reports account activity to the three major credit bureaus (Experian, Equifax and TransUnion) that maintain credit reports.

Then, the borrower should use that secured card for small purchases and pay off the entire balance each month. "The credit bureau doesn't care how much you're paying. They just want to see those on-time payments and that your history is being built up again," Bernstein says. Some secured cards enable the borrower to upgrade to a standard unsecured account after a set length of time (such as 12 to 18 months) of responsible borrowing, so compare features on your secured card to see if that's a possibility.

To close or not to close?
Borrowers who already have loans, meanwhile, should take their length of credit history into account before closing an existing credit account. That's because, as discussed earlier, closed accounts will eventually fall off their credit reports. 

Once those accounts are removed from your credit reports, they will no longer be included in the calculation of your FICO score, since the score is calculated as a snapshot of your reports at a specific time. That means that closing an account can dramatically shorten your credit history, depending on how long you've had your individual cards. 

Here's how: Say you have a 20-year-old credit card and a 5-year-old credit card and no other loans. That means your credit history, in FICO's eyes, is 20 years long. However, when you cancel the oldest card and it eventually falls off your credit report (in either 10 years or 7 years, depending on your circumstances) that card will no longer be counted in your credit history. You will have basically trimmed your credit history by 15 years, the difference between the ages of the cards, and that can have an impact on your credit score.

Closing an account can have a more immediate impact on the borrower's utilization ratio -- the amount you owe compared to your credit limit -- which could also hurt their FICO score. When considering length of credit history, choose to close carefully. "Always go with a high interest account you haven't had for too long," Bernstein says. The accounts "you're keeping should have a good length of history on them and make sure you're paying them on time, the best you can."      

By taking a wise approach, your length of credit history will grow old gracefully. 

"In terms of credit history, protect it with your life. It's only 15 percent, but it means so much to creditors," Bernstein says.

See related: How your FICO score is determined: Payment history, How your FICO credit score is calculated: How much you owe, How your FICO credit score is calculated: New credit, How your FICO credit score is calculated: Types of credit used, The FICO 5: Breaking down the elements of the FICO scoreSurvey: Secured cards offer chance to rebuild good credit -- for a price

Published: July 11, 2011


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