Credit Myths Exposed: Length of Credit History is Age Related
This part of the credit scoring model is the cause of one of the most prevalent credit scoring myths. It addresses the age of the information in your credit history, not your own age. Believe it or not surveys have shown that an overwhelming percentage of consumers wrongly believe that your age can have an effect, either positive or negative, to your credit scores. Your age is not a component of credit scoring models.
What Exactly Does How Long You Have Had Credit Mean?
What it means is the age of your credit report. Yes, your credit report has an age just like anything else. And that age has a positive or negative value in your credit scores. This value equates to 15% of the points that make up your overall credit scores. The question now becomes how the credit scoring models determine the age of your credit file and how the age impacts your score. Let's investigate the various ways this occurs.
The age of your oldest account - Each of the accounts on your credit report has a field called "Date Opened." This date has been reported to the credit reporting agencies by your creditors. The date opened is supposed to be exactly what it sounds like - the month and year that the account was opened.
The credit scoring models can read this date and "age" the account by calculating the number of months and years that the account has been open. Once this is done on all of the accounts, the models will then determine which one is the oldest. This oldest date becomes the age of your credit report.
The average age of your accounts
Another important measurement is the average age of your accounts. This is simply the average age of all of your accounts as measured using, again, the date opened fields. For example, if you have 2 accounts that are 3 years old and 5 years old respectively your "average age of credit" will be 4 years.
Since credit information is constantly being added to and removed from your credit reports, a logical question would be to ask what happens to these two categories when items fall off and get added to your reports. The answer is that accounts falling off and being added to your credit report will cause your average to change constantly. Sometimes this can have negative consequences. Remember this when a borrower wants to remove an item from their report.
When information is removed from your credit reports it essentially disappears and cannot be used in any sort of credit scoring measurements. As such, old accounts that fall off of your credit reports can never help your average again.
Why Does the Age of My Credit Report Matter?
As with any component of a credit scoring model, the developer's research has determined that these age measurements are valuable enough to make it into their models. In fact, these measurements have made it into the models for decades and it doesn't look like they are losing any value so expect them to be around for a while.
In this case the use of age makes statistical sense as well as common sense. Consumers with a younger credit history tend to be more risky borrowers than consumers who have had credit for many years. Put yourself in the position of being a lender. If someone came to you and asked you to borrow $10,000 wouldn't you want to know if they've ever borrowed any money in the past? Or, is this their first time? Are you comfortable being their first lender? How about if they wanted to borrow $250,000 from you to buy a house but they show no history of borrowing money, especially that amount. Are you willing to take that chance? As you can see, it's not really unreasonable to take age into account when making these decisions. It's not a popular choice but it's certainly hard to argue that it's not a good idea.
The Impact to Your Credit Scores
Credit scores are a standard component used in today's lending environment. Each of us has three different credit scores, one generated from each of our three credit reports. It's important to become familiar with the impact the age of your accounts has on your credit scores.
The goal for this category is very simple. You want your credit reports to be as old as possible. You also want the average age of your accounts to be old as possible. The older these measurements, the more stable your credit reports will become. And in this case, with stability comes more points for your credit score
There really isn't a target age that you should strive to achieve. At some point you will max out on the points for this category and aging your credit files any longer really won't help. While the optimal ages are a closely guarded trade secret, it's safe to say that you will have to have had credit for many years before you will earn the maximum points in this category. The good news is that now that you know how important these age measurements are, the better credit shopping decisions you can make.
How Can You Ensure Earning the Maximum Points Available out of the How Long Have You Had Credit Category?
1. Get started and be patient - We all started in the same spot, with no FICO score. If you are a young consumer or have chosen not to ever use credit then it's time to get started. Applying for an easy-to-get account like a retail store card or a secured credit card will establish a FICO score in your name. Now it's time to be patient as that account ages.
As you add new accounts to the credit report you will hurt your average age of account (remember that the credit scoring models also average the age of your accounts) but eventually the numbers will work in your favor. If you have many accounts that are very old you won't be able to lower your average any longer. You've arrived.
2. Do NOT ever try and get old accounts removed - For some reason a very common myth floating around is that you should have old or closed accounts removed from your credit reports. Why would you ever want your history and positive payment removed from your records? What if you got excellent grades in high school and college 20 years ago? Why would you ever fight to have that record removed? You wouldn't. Don't be fooled into thinking that old accounts hurt your credit scores. They do nothing but help them. Leave well enough alone.
Exception - As with all rules there are exceptions. In this case it's more of an "FYI" than an exception. You may be wondering whether to remove old accounts that are negative? Isn't it better to have those accounts removed? Absolutely...
However, negative items 95% of the time will automatically be removed after their statute of limitations expires. You normally will not have to ask that they be removed. It is done by the credit bureaus as a standard practice. Unfortunately, I have seen items stay on a report well after the statute of limitations on many credit repair files we work on. It is always good to make sure the Bureaus do their job.
3. Be aware that opening accounts will lower your average age - The advice here isn't to not open new credit accounts, but to do so strategically. Everyone has to open credit card accounts, buy cars and houses and finance other things. You should be aware, however, that each time a new account hits your credit file the age of that account will become part of the averaging process. And since the account is brand new it will lower the average age of your accounts. So, be selective when you are shopping for credit. Don't open up multiple retail store credit cards around the holiday season just to save 10% off your purchase. The negative impact to your scores will cost you much more in the long run
There are many times when attempting to spike a borrowers credit score, we have no choice but to have them apply for new credit. The benefit in this case is always outweighs any possible negative. But I cannot stress enough that new credit should always be used strategically & judiciously.