Length of credit history: What it means to your score
The longer you?ve been using credit, the better your chances of a high FICO score
In the credit scoring world, 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 prove beneficial.
“Generally, the older your length of credit history, the better it is for your FICO score,” said Barry Paperno, a credit scoring expert who has worked for FICO and Experian.
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. As a result, to improve their ability to qualify for low interest credit, borrowers will want to work on building up 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 debt you have available compared to how much you use, known as credit utilization.
3. How long you’ve had credit.
4. How much new credit you have.
5. The mix of credit you have.
Accounting for 15 percent of a FICO score, “length of credit history” falls 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 Experian’s State of Credit 2016 report, members of the Silent Generation have the highest average credit score (730) of any age group. That’s 30 points higher than baby boomers.
But you don’t necessarily have to be a “grizzled veteran” of credit to have a great credit score.
“It’s quite possible for a person with a relatively short credit history to have a score equal to a score for a person with 30 years of credit history,” said Rod Griffin, director of public education at Experian. “It’s really about how you manage the credit you have available. Of course, you do need to have some length of history in order for scores to be calculated.”
Even if your history isn’t perfect, it’s still important to have one. 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:
1. How long accounts have been open.
2. How long specific account types have been open.
3. 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?
“The minimum amount of credit history needed to generate a FICO score is six months or more on at least one credit account,” said Paperno.
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, Florida, (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 distaste for debt.
“It put me off any kind of borrowing,” she said.
She later remarried 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.”
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 said.
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 other 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? If you’re new to credit, try asking a bank with which you have a checking or savings account for a credit card. Or try to open a retail or gas card, which often come with low credit limits, but are often easier to qualify for.
“If you already have a checking or savings account, your bank or credit union may be more likely than others to approve you for a card with a small credit limit,” Griffin said.
Another option is 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.
“Using a secured card is a low-risk way to build credit,” said Heather Battison, vice president at TransUnion. “With a secured card, consumers can use credit for small purchases like groceries, pay the balance in full each month and establish a history of responsible borrowing.”
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.
You can also ask a family member or close friend who has a credit card to add you as an authorized user on his account. As an authorized user, the account’s history will be added to your credit report. Just be sure your friend or relative’s account is in good standing, with no missed payments and a low balance relative to its credit limit.
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 and if you don’t take out any new credit cards or loans in the near term.
While it’s true that keeping your card accounts open can help your score, there are cases in which canceling a card is the better option. If the card tempts you to overspend or it has a high annual fee you can no longer afford, considering canceling it, even if you stand to lose a few credit score points. After all, missing a payment or maxing out a card will cause more damage than shortening your credit history.
For instance, if you have one card with a $10,000 credit limit and a zero balance, and another card with a $5,000 limit and a $4,000 balance, your overall utilization ratio is 27 percent. But if you close the $10,000 limit card — perhaps because it’s not being used – your credit utilization rate jumps to 80 percent. Such a dramatic change in your debt-to-limit ratio would almost certainly hurt your score.
If you do keep all of your accounts open, be sure to pay them on time and keep your balances as low as possible. Your credit will grow old gracefully, and your score will stand the test of time. Now that you are up to speed on credit history, here is a great place to start researching for a credit card.
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