Length of Credit History makes up 15% of a FICO Score –
Welcome to the 4th post from The FICO Score Mini-Series. In this weeks post you will learn about a pretty important factor. So let’s jump right in.
Your Length of Credit History is only 15% of your FICO Score, right? Yes… but before I unpack “Length of Credit History” there is an important element to address first. To acquire a FICO Score, consumers first need to have at least some credit history (credit bureaus like to see 6 months). What we are talking about is simply a track record. The saying is “bad credit is better then no credit”. This is absolutely true. Lenders and Creditors want to see at least some activity before they can assess your credit worthiness. Although it’s not the most heavily weighted factor used to calculate a borrower’s FICO score, the length of a borrower’s credit history does matter. And within that component, age and experience typically proves beneficial.
So wait until you’re old? No, not exactly. There’s actually a legal way for younger folks to “create” a credit history.
- ask a parent or immediate relative to add you as an Authorized User to their credit card (some credit card users don’t report the authorized user to the bureasu so ask your card provider questions in advance).
HISTORY IN THE MAKING
If you can’t find someone to add you as an Authorized User don’t sweat it. There are sever other ways to begin building your credit on your own. They are:
- find a Co Signer on your loan (this could be an auto loan)
Mom or dad can cosign on your auto loan, just ask the lender to report you to the 3 major bureaus.
- student loans
Ff you are attending college you will find that you didn’t need a cosigner for your students loans and your student loans are definitely reported to the 3 major bureaus. So make those minimum payments on time. If you can’t, then get a deferment or Income Based Repayment Plan.
- apply for secure credit card
You don’t need credit history for a secure credit card, only cash for the deposit. It’s reported to the credit bureaus as a credit card.
- apply for secure bank loan
This is similar to a secure credit card. Ask your bank to give you a secure loan with 85% deposit. Your savings account will be frozen and as you make monthly payments, that money will become available.
Another important factor to understand is how FICO calculates “length of credit history”.
FICO breaks down “length of credit history” into three pieces:
- How long accounts have been open.
- How long specific account types have been open.
- How long it’s been since those accounts were used.
To end this our wonderful time together I’ll leave you with some helpful insight.
Say you have a credit card with a long credit history. Do you close it or keep it open?
To answer that question I’ll first say that closed accounts (good or bad) will fall off your credit report in 7-10 years depending on the State.
Say you only have 2 credit cards. a 15-year-old credit card and a 5-year-old credit card. That means your FICO “length of credit history” is 15 years. So if you cancel the oldest credit card and it eventually falls off your credit report (7-10 years), that card will no longer be counted in your credit history. You will have basically trimmed your credit history by 10 years. That may have an impact on your FICO Score.
In addition, accounts with long credit history will typically have the largest credit limit. By closing your large credit limits accounts you will immediately hurt your “Total Debt” (debt/income ratio). More on that here.
When considering length of credit history, choose to close carefully. It can hurt your FICO Score.