How average credit account age affects your FICO score
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Dear Speaking of Credit,
I opened a card at Christmastime to gain a discount on a high-dollar item. The impact to my age of credit history dropped from 5.51 years to 5.21 years. My oldest account is more than 10 years old and this is my newest account at 7 months. My credit age is now back up to 5.6. Is there value add in closing the account -- what is the impact to age of credit versus the impact to utilization rate. -- Sarah
You have identified some of the most important factors within the "length of credit history" category of FICO credit scoring that, as a strong predictor of future credit risk, makes up about 15 percent of your score: Average age of accounts -- total months of all accounts on your credit report from the open dates to the present, divided by the number of accounts. Oldest account: account with the earliest open date. Newest account: account with the most recent open date.
While 15 percent of your score doesn't sound like much, especially when compared to the "payment history" and "amounts owed" categories that account for 35 and 30 percent respectively, the scoring effects of these age-of-account measurements actually reach further than this relatively small percentage would indicate.
They do this, not only by affecting your score within the length of credit history scoring category, but also by determining how much your score will be impacted by factors found among the other four categories: payment history, amounts owed (credit utilization), new accounts and credit mix (types of credit).
As a common example of how length of credit history characteristics directly affect other areas of your score, a consumer relatively new to credit with only a short credit history would be more likely to see the addition of a single late payment or maxed-out card do extensive score damage than would a consumer having a longer credit track record.
Such scoring dynamics in which scoring calculations affect multiple categories are not just limited to this length of credit history example, however. Payment history and new accounts calculations can similarly influence the other scoring categories simply by their presence or absence. Interestingly, though, the two categories that don't tend to engage in this kind of cross-pollination are those that measure amounts owed and credit mix.
In answer to your first question of whether you should close the most recently opened account to lessen the negative effect of its short credit history, I would not recommend it. Length of credit history-related calculations apply equally to all open and closed accounts, so there's no undoing the short history of that newest account by closing it. Fortunately, with every month that goes by, each of your accounts gets a little older and contributes a little more history to your score, so don't despair.
As for your second question regarding how the scoring impact of credit age compares with credit card utilization (balance/limit ratio), despite what I've just said about the added effect of length of credit history factors on other scoring categories, you still don't want to underestimate the scoring impact of credit utilization, regardless of how extensive your credit experience may or may not be.
Utilization is the driving force within the amounts owed category that makes up almost one-third of your score, and is second only to payment history in overall scoring impact. So, in other words, no matter how long you've been using credit, it's how you pay and how much you owe that will always be most the important elements within your score.
To effectively manage the length of the credit history portion of your score so that you maximize the influence of low utilization and on-time payments, or, if necessary, minimize the effects of any high utilization or late payments, simply continue to:
- Raise your average age of accounts by refraining from opening any new accounts.
- Increase age of your oldest accounts and make their presence felt by keeping them open and active.
- Allow your most recently opened account to age by not adding any new ones.
While "older the better" is about the best advice available if you're looking for specific account age-related goals, the following FICO statistics can help lend some real-world perspective to how your own credit experience might compare to other consumers':
|AVERAGE ACCOUNT AGE: HOW PEOPLE WITH EXCELLENT, FAIR CREDIT COMPARE|
|Credit score||Average age of credit accounts||Oldest account age||Newest account age|
|650-699 (Fair credit)||7 years||12 years||6 months|
|750-850 (Excellent credit)||11 years||25 years||2 years|
I hope with this bit of insight into how the scoring formula's length of credit history measurements impact your credit score, you should now have a good feel for why these things matter and what you can do -- and not do -- to maintain the highest score you can.
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