How Does Length of Credit History Affect Your Credit?

Your credit score is a crucial factor in many aspects of your financial life. It influences your ability to get approved for loans, credit cards, mortgages, and even rental applications. One of the key components that lenders consider when assessing your creditworthiness is the length of your credit history. This blog post will delve into how the length of your credit history affects your credit score and provide insights on how to manage and improve this aspect of your credit profile.

Understanding Credit History Length

Credit history length refers to the age of your credit accounts. It encompasses the age of your oldest account, the age of your newest account, and the average age of all your accounts. Lenders use this information to gauge your experience managing credit and to predict your future repayment behavior.

What Counts as Credit History?

Typically, credit history includes accounts like:

• Credit cards (both secured and unsecured)
• Installment loans (e.g., auto loans, student loans, personal loans)
• Mortgages
• Lines of credit (e.g., home equity lines of credit - HELOCs)

Accounts such as utility bills (electricity, gas, water) and phone bills are typically *not* included in your credit history unless you default on payments and the debt is sent to a collection agency. Rent payments are also generally not included unless reported to a credit bureau by a landlord or through a rent-reporting service.

Why Credit History Length Matters

Lenders view a longer credit history as a positive indicator. It demonstrates that you have a proven track record of managing credit responsibly over time. A longer history provides more data points for lenders to assess your repayment habits and assess risk. Here’s a breakdown of the key reasons why credit history length is important:

• Demonstrates Responsibility: A long and positive credit history suggests you have consistently paid your debts on time and managed your credit accounts well.
• Provides More Data: The longer your credit history, the more data lenders have to evaluate your creditworthiness. A longer history can help offset the impact of occasional minor mistakes.
• Predicts Future Behavior: Past behavior is a strong predictor of future behavior. Lenders use your credit history to estimate the likelihood that you will repay future debts.

How Credit History Length is Calculated

Credit history length isn't just about how *old* your oldest account is; it's a more complex calculation. The major credit scoring models, FICO and VantageScore, consider several factors related to the age of your accounts:

1. Age of Oldest Account: This is the age of the first credit account you opened. It's a significant factor because it shows how long you've been in the credit system.
2. Age of Newest Account: This is the age of the most recently opened account. Opening too many new accounts in a short period can lower your average age of accounts and potentially impact your score negatively.
3. Average Age of All Accounts: This is calculated by adding up the age of all your credit accounts and dividing by the total number of accounts. This is arguably the most important factor related to credit history length.

Example of Average Age Calculation

Let's say you have the following accounts:

• Credit Card 1: Opened 10 years ago
• Credit Card 2: Opened 5 years ago
• Auto Loan: Opened 3 years ago
• Personal Loan: Opened 1 year ago

To calculate the average age:

(10 + 5 + 3 + 1) / 4 = 4.75 years

In this example, your average age of accounts is 4.75 years.

The Impact of Credit History Length on Your Credit Score

Both FICO and VantageScore incorporate credit history length into their scoring models, but the specific weight assigned to it varies. While not the *most* important factor, it still holds considerable influence.

FICO Score

Under the FICO scoring model, credit history length typically accounts for around 15% of your credit score. This emphasizes the importance of building a long and consistent credit history over time. A longer history generally results in a higher score, assuming you manage your accounts responsibly.

VantageScore

VantageScore uses a different weighting system. The impact of credit history length is generally considered to be moderately influential, but VantageScore places a higher emphasis on payment history and credit utilization. The specific weighting can vary depending on the version of VantageScore being used.

What is Considered a "Good" Credit History Length?

There isn't a magic number for credit history length, but generally, the longer your credit history, the better. Here's a guideline:

• Excellent: 7 years or more
• Good: 3-7 years
• Fair: 1-3 years
• Poor: Less than 1 year

Keep in mind that these are just general guidelines. Other factors, such as your payment history, credit utilization, and types of credit accounts, will also influence your overall credit score.

Strategies to Build a Strong Credit History Length

Building a strong credit history length takes time and consistent effort. Here are some practical strategies:

1. Open a Credit Account Early: The sooner you start building credit, the better. Consider opening a secured credit card or a student credit card when you are eligible.
2. Keep Old Accounts Open (Responsibly): Even if you don't use a particular credit card often, consider keeping it open (as long as there are no annual fees) to maintain a longer average age of accounts. Make a small purchase occasionally to keep the account active.
3. Avoid Opening Too Many Accounts at Once: Opening multiple credit accounts in a short period can significantly lower your average age of accounts and raise red flags for lenders.
4. Become an Authorized User: Ask a trusted family member or friend with a long and positive credit history to add you as an authorized user on their credit card. This can help you piggyback on their credit history, but only if they manage their account responsibly.
5. Consider a Credit Builder Loan: These loans are designed to help people with limited or no credit history establish credit. You make fixed monthly payments, and the lender reports your payment activity to the credit bureaus.

The Importance of Responsible Credit Management

While credit history length is important, it's crucial to remember that it's only one piece of the puzzle. Maintaining responsible credit management habits is equally important. This includes:

• Paying Bills on Time: Payment history is the most significant factor in your credit score. Always pay your bills on time, every time.
• Keeping Credit Utilization Low: Credit utilization refers to the amount of credit you're using compared to your total available credit. Aim to keep your credit utilization below 30%.
• Avoiding Maxing Out Credit Cards: Maxing out your credit cards can severely damage your credit score and signal financial distress to lenders.
• Monitoring Your Credit Report Regularly: Check your credit report regularly (at least once a year) for errors and inaccuracies. You can obtain free copies of your credit report from AnnualCreditReport.com.
• Diversifying Your Credit Mix: Having a mix of different types of credit accounts (e.g., credit cards, installment loans) can positively impact your credit score, but only if you manage them responsibly.

What if You Have a Short Credit History?

If you're just starting out and have a short credit history, don't despair. There are several steps you can take to build your credit profile:

• Start with a Secured Credit Card: Secured credit cards require a cash deposit that serves as collateral. They're a good option for people with limited or no credit history.
• Apply for a Student Credit Card: If you're a student, consider applying for a student credit card, which are often designed for young adults with limited credit.
• Become an Authorized User: As mentioned earlier, becoming an authorized user on a responsible account can help you build credit quickly.
• Report Rent Payments: Explore rent-reporting services that report your rent payments to the credit bureaus. This can help you build credit without using traditional credit accounts.
• Stay Consistent: The key is to be patient and consistent. Building a strong credit history takes time, but with responsible financial habits, you can achieve your credit goals.

Correcting Errors on Your Credit Report

It's essential to regularly review your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) to ensure the information is accurate. Errors on your credit report can negatively impact your credit score. If you find any errors, such as incorrect account balances, late payments that you didn't make, or accounts that don't belong to you, you have the right to dispute them.

How to Dispute Errors:

1. Gather Documentation: Collect any documents that support your claim, such as bank statements, canceled checks, or payment confirmations.
2. Write a Dispute Letter: Write a formal letter to the credit bureau detailing the error and explaining why you believe it's incorrect. Include copies of your supporting documents (never send originals).
3. Send the Letter via Certified Mail: Send your dispute letter via certified mail with return receipt requested so you have proof that the credit bureau received it.
4. The Credit Bureau Investigates: The credit bureau has 30 days to investigate your claim. They will contact the creditor or lender to verify the information.
5. Resolution: If the credit bureau finds that the information is indeed incorrect, they will update your credit report accordingly. You'll receive a written notification of the results of the investigation.

If the credit bureau doesn't resolve the issue to your satisfaction, you can add a statement to your credit report explaining your side of the story. This statement will be included whenever your credit report is accessed by lenders or other parties.