Let’s face it: When it comes to credit scoring, you can’t assume anything. For example, if you think you know what “length of credit history” means and how this factor affects your FICO score, you might very well be wrong.
But never fear, the Nerds will tell you everything you need to know about this important credit score category. Let’s dig in.
How length of credit history fits into your FICO score
First, let’s review how length of credit history fits into your overall FICO credit score. The FICO score is the one most commonly used by lenders in the United States, so knowing its ins and outs is key.
The FICO model looks at a consumer’s credit profile and determines his or her score based on following factors:
- Payment history (35% of the score)
- Amounts owed (30% of the score)
- Length of credit history (15% of the score)
- Mix of accounts (10% of the score)
- New credit inquires/applications (10%)
After payment history and amounts owed, length of credit history is the most influential aspect of your FICO score. As a result, it’s essential to do a deep dive into this category to figure out what it exactly means.
How length of credit history is calculated
If you think “length of credit history” is one simple figure, i.e., the years or months since you started using credit, this is a good starting point – it’s just not the complete picture.
To get some answers, the Nerds reached out to Anthony Sprauve, senior consumer credit specialist at FICO. In an email statement, he pointed us to the information that’s found on the company’s website. It states that length of credit history refers to the following data points, which are crunched into your overall FICO score:
- The age of a consumer’s oldest credit account.
- The age of a consumer’s newest credit account.
- The average age of all of the consumer’s credit accounts.
- How long different types of credit accounts (mortgages, credit cards, auto loans, etc.) have been established.
- How long it’s been since different types of credit accounts have been used.
To get a better sense of which of these is most influential, the Nerds followed up with Sprauve. In an email he told us that:
“Age of oldest account and average age of all accounts [count the most]. The longer credit history a person has, the better for them.”
We also asked why it matters how long it’s been since a person used one of their credit accounts – as long as it’s still showing up on a consumer’s credit report, doesn’t it have the same bearing on the FICO score? Actually, no. Sprauve explained:
“Active accounts have a larger bearing on a consumer’s FICO Score because they show the most recent activity. Recent activity has more impact on the FICO Score than older activity.”
Tips for scoring high in this FICO category
Now that it’s clear how length of credit history is determined, you’re probably wondering what you can do to score high in this category. Here are the Nerds’ top tips:
- Start using credit responsibly as soon as you can. For most folks, the easiest way to do this is by getting a credit card in early adulthood.
- Be cautious when opening new accounts. Every time you get new credit, you’ll be lowering your average age of accounts. Only apply for loans or cards you actually need.
- Think twice before closing an old credit card . Although a closed account with positive information will stay on your credit reports for up to 10 years, its effect on your score will diminish over time.
- In that same vein, keep old accounts active if you can. For most people, the easiest way to do this is by linking an old credit card to a monthly subscription service, like Netflix or a gym membership. According to Sprauve: “It’s prudent to continue to use older accounts so they don’t go dormant and run of the risk being closed …”
The takeaway : The length of credit history portion of your FICO score is a little complex than meets the eye. But by using credit responsibly from an early age, minimizing new credit applications, and keeping old credit accounts active, everyone can score high in this category.
Confused image via Shutterstock
The post Length of Credit History: What Does It Mean? appeared first on NerdWallet Credit Card Blog.
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