March 25, 2020
This is the third of a 5-part series to clear up the confusion about what goes into your credit score.
In this segment, I am going to cover the third most important part of your credit score. In other words, I am going to go into detail on the factor that has the third most impact on your credit score.
While most people would believe the importance of the first and second biggest factors, most people would never think to include this one in creating a credit score. But since we don’t get to decide how our credit scores are calculated, this one is included anyway.
The third most important part of your credit score is your length of credit. This one is also known as the average age of accounts. Here’s how it works.
In deciding what is important in predicting how likely it is that someone will be a credit risk, the credit bureaus along with Fair Isaac Company (aka FICO) have determined that the length of time you have had credit is the third most important thing.
There are two parts to this. First, there is the length of time you have had credit. Second, there is the average age of your accounts.
The age of your oldest account definitely plays a part in this. This tells us that for this part of your score, you want to keep accounts open as long as you can. For car loans and other accounts that have an end date to them, they can only get as old as the maximum length of the contract. For a 5-year car loan, the oldest it can get is 5 years.
But credit card accounts don’t have a closing date. They can be kept open as long as you want (and as long as the credit card company is happy with you which usually means as long as you keep paying them, you can keep the account open.
Credit card accounts are the most common accounts to have for a long period of time. Even 30-year mortgages don’t usually stay open for more than a few years but I have seen many credit reports that showed a credit card account that had been open for more than 20 years.
Having even one account that has been open for that long can help your credit score. But that is only half the equation. Remember that your average age of account is important too.
The credit bureaus won’t tell you how long your average age of account should be but knowing that the longer it is, the more it helps your score can help in making decisions about opening and closing accounts.
A new account will automatically reduce your score in this part of the scoring system because it will reduce the average age of your accounts. But being added to an older account as an authorized used will help your score in this area.
Another thing to think with is that if you are considering closing a credit card account, you may want to think twice before doing it. This is true even if you don’t like that company or you feel they have done something to you.
The reason is that you may be harming yourself by closing an account, in two ways. The first is that you are reducing your average age of account, but this will not affect your score immediately. It will take time since even a closed account will be counted when determining the average age of your accounts.
So it will take time for it to reduce your average age of account. The bigger impact actually has to do with the previous blog post where I went over the effect that your account balances have on your credit.
When you close a credit card account, it immediately affects the amount of credit you have available. Therefore, a closed account can hurt your credit twice, now (by increasing your usage of available credit) and later (by reducing your average age of account).
The way it hurts your average age of accounts, however, is not going to be felt until it drops off your report in seven years. But you won’t get credit for any additional time on that account.
Knowing this information along with the credit usage information on your credit report can help you decide whether to close an account or just let it get older and not use it.
It is a good idea, as long as the terms of the card do not cost you additional money (like annual fees) to keep older cards open regardless of whether you ever intend to use them again.
In fact, if you have cards that you don’t use, credit card companies will close those accounts after a certain amount of time if they are not used. In some cases, they will tell you in advance and in others they may just close them.
To protect against having accounts closed when you don’t want them closed, you can use those accounts from time to time, but at least once a year, to buy something you would normally pay cash for. Then, when the bill comes, pay the balance and you usually won’t have to pay any interest.
This keeps the account open, extending your average age of account while keeping your credit usage low as compared to the credit available to you. Doing it this way helps your score in two ways.
When you are first starting out in credit, this part of your score is going to hold you back but it doesn’t mean that you can’t have a good score. It just means that you will need to pay more attention to the other factors while you are building your credit history.
For more information about credit, you can buy my book Crack The Credit Code on Amazon. Here is the link: Crack The Credit Code
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