Length of credit history matters more when you're young

Like wine, credit score improves with age

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Question for the CreditCards.com expert

Dear Speaking of Credit,
Hi, I have three credit cards. One is a first-time card through my credit union. I got it to build credit. Another was a Best Buy card, I got it to buy a TV for my new house. It's interest free for 12 months. Paying it off and putting it away. I opened another card for items for my new house. Interest free for eight months as well. Both of those cards are being paid on once a month. I pay more than the minimum. I also pay on my first card twice a month. I use that one most often for everyday use. My credit score was 680 when I opened my last card.

I got an offer for another card, good rewards and 18 months with no interest. No annual fee. I was thinking of applying for one just to help get these other cards paid off for good. Would that hurt my credit? Do you think it's a good idea?

I'm 24 years old and can't find much of an offer. I'm a responsible shopper. Don't go out of my spending range. I just got it for the new house and needed a lot of things. That's why I opened the other ones and that was 75 percent of my spending. Thanks for the time -- Jonathan

Answer for the CreditCards.com expert

Dear Jonathan,
Congratulations on the new house! For someone of a relatively young age you appear to have learned the skills of credit management quite well. By qualifying for a home purchase and taking advantage of deferred-interest credit plans, you're smartly leveraging the amount of credit that's been made available to you.

You're also doing right by paying more than the minimum or making multiple payments on your cards each month. Still, you seem to be finding that, while most of those cards may be interest free as long as they are paid in full by the due date, the balances you owe, particularly in relation to the credit limits, appear to be taking a toll on your scores in the form of higher credit utilization (card balance/limit) percentages. Fortunately, as these balances are paid down the negative impact will diminish with no residual effect on your scores.

Having both a mortgage and credit cards and keeping up with all the payments would ordinarily be enough to give you a solid credit score. Yet, yours is a below-average 680. The negative factors holding back your score -- and with it the ability to get better card offers -- are your high credit card balances and your youth. To put it in credit scoring terms, your score displays a higher degree of sensitivity to utilization due to the short credit history someone of your age is likely to have.

When talking about scores, most of the discussion typically tends to center around payment history and amounts owed, since these two categories together make up almost two thirds of your score. What's often left out of these discussions is the impact from the third-most-important category -- length of credit history -- that makes up about 15 percent.

The length of time a consumer has been using credit has been found to be a good predictor of future risk: Longer history means lower risk. In the credit scoring formula, length of credit history acts as a multiplier for those with a short credit history, amplifying the impact of each missed payment, each credit inquiry, each maxed-out credit card.

Now, let's answer your question of whether to accept a new card offer or apply for another card.

To do so, I'll give you an illustration of one of the calculations that goes into figuring your length of credit history: average age of accounts. A longer average age of accounts helps your score, a shorter one hurts it.

In this example let's suppose the history of your mortgage and three cards looks like this:

Accounts Months
Mortgage 12
Card 1 24
Card 2
Card 3
Total months 60
Average age of accounts (60/4) 15

Now, with the age of your accounts averaging 15 months, let's look at how this calculation will be impacted by adding a newly opened card:

Accounts Months
Mortgage 12
Card 1 24
Card 2
Card 3
Card 4
Total months 60
Average age of accounts (60/5) 12

As you can see, by adding card No. 4 you have instantly reduced your average age of accounts from 15 to 12 months -- and a shorter average age hurts your score. While this is just one of a set of calculations that make up only 15 percent of your score, its potential effect on your score should not be ignored.

Keeping in mind the impact of a new account on your length of credit history and other scoring categories, I'm going to recommend that you don't respond to that card offer or apply for a new card or that, if you do, you make it your last new one for at least six months or more. The rule here should be that the longer you can hold off on adding a new account of any kind the better it will be for your score in the long run.

Then once you have taken a break from opening new accounts for a while, the combination of on-time payments, reduction in the amount you owe and ever-increasing length of credit history should have your credit scores steadily climbing into the 700s within six months or so. And, as an added benefit -- or downside, depending on how you look at it -- along with those higher scores, expect to see more-frequent and higher-quality card offers over which to agonize.

You've done a great job of managing your credit, Jonathan. Now just turn down the heat a bit and let the credit accounts you have simmer slowly away without any new additions for as long as possible.

See related: 9 baby steps that lead to big financial goals, Help your credit score rebound after a fall, How credit score formula handles multiple credit inquiries

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Updated: 01-21-2019