In previous posts I discussed the two factors that make up 65% of your FICO score: your payment history (35%) and your total debt (30%). Today we'll discuss how the length of your history affects your score.
Although the length of your credit history only weighs in at 15% of your score, it is still vitally important. Don't confuse this with your payment history; your payment history is the quality part, while your payment length is the quantity part.
How Much Credit History Is Enough?
Well, this is the case where age comes before beauty. You need the beauty part, which is the quality, but you need the age as well, not unlike Jaclyn Smith, still drop-dead gorgeous at, well, over 55. Yes, you guessed it, the longer the better, just like anything else. If you're choosing a mutual fund to buy into, you'd look at their track record; how they fared during the financial meltdown, and further in their history. While history can't predict the future, it is a good start. Those with a perfect score of 850 had an average age of 61 and had their accounts open for decades.
Okay, so now you're thinking about the quality part. Yes, that is important, but most credit experts will tell you it's better to have some history (with some bumps and bruises,) than none. In order to have some history, six months is the bare minimum; if lenders have to guess how you pay your bills, they'll just charge you a higher interest rate. Wouldn't you demand a higher rate of return on an investment with no history?
Credit History Catch-22
Yeah, I know, if you don't have a history, you can't open an account because you can't start without a history. One of the best ways to overcome that situation is to get a secured card; you make a deposit to the credit card company and this becomes your limit. Make charges on the card and pay it off on time! By 12 to 18 months, with a good history, they'll probably offer you a grown-up, real card that is not secured. Just make sure the card reports to all three credit bureaus: Experian, Equifax and TransUnion.
Closing Credit Accounts
Now that you've become a pro at opening accounts, let's talk about closing them. It's not a good idea to close accounts with a long history, especially if the history is good (with quality and quantity), because you'll start the clock all over again. Although a closed account will remain on your credit report for 10 years, it will eventually drop off, which will drastically shorten your history at that time. Don't erase all that good history. Instead, close the accounts you don't use much.
Have you seen a favorable history with your credit card accounts affect your FICO score?