Length of Credit History: How Does It Affect Your Credit Score?
You’re likely already familiar with good credit and bad credit. If so, you’ve probably heard about credit history. So, what exactly does credit history mean and why does its length matter?
Credit history is a record of your debts, payment history and any public records. Simply put, the length of your credit history is how long you’ve used credit.
The length of your credit history begins when you open your first credit card or take out your first loan. Your credit history will grow with age and as you open new accounts. To better understand it, let’s explore how it's calculated and how it affects your credit score.
How Is the Length of Your Credit History Calculated?
The length of your credit history is broken down into three parts:
- How long accounts have been open
- How long specific types of accounts have been open (revolving and installment)
- How long it’s been since you last used these accounts
An easy way to find your credit history is to request a credit report. The three main credit bureaus (Experian®, TransUnion® and Equifax®) offer one free credit report each year. You can visit Annual Credit Report to request your free reports.
Within your credit report, you’ll find a listing of your accounts, the type of account, the date each was opened, and the last time you used each account.
One term to be aware of is your Average Age of Accounts (AAoA). FICO® uses this formula to calculate your average length of credit history. It’s a simple calculation: divide the ages of your oldest and newest accounts by your total number of accounts.
If you only have one credit account, your length of credit history and average credit age are the same. But for most people, several different credit accounts will play into the length of credit history as well as the average.
If needed, you can calculate AAoA on your own using the information from your credit report. You can see where you land on the credit history spectrum.
How Does Credit History Affect Your Credit Score?
The length of your credit history, or how long you’ve been using credit, typically accounts for 15 percent of your total credit score.
While it isn’t the most important factor used to calculate your FICO® score, the length of your credit history does matter. Generally, the longer your credit history, the better it is for your credit score.
The minimum amount of time you need to have an account open for FICO® to calculate a credit score is six months. If you’ve just opened your first credit account, you may not have enough credit history to calculate a score yet.
There’s also usually a limit on how long closed accounts remain a part of your credit history. Most closed accounts remain a part of your credit history for 10 years.
While a shorter credit history will prevent you from achieving a perfect credit score, it’s not something to fret over. Adopting good financial habits over time will help improve your credit score and history.
What Is a Good Credit History Length?
Seven years is deemed a reasonable amount of time to establish a good credit history. After seven years, most negative items will fall off your credit report. However, the seven-year time period doesn’t guarantee your credit score and credit history will improve.
If you continually pay your bills on time (and in full) each month and reduce the amount you owe, your score may get the boost you need over time. It helps to check your credit report regularly.
There’s also no set amount of time required to achieve a certain credit score. Everyone has a unique financial situation, so the time it takes to boost your credit score and build credit history will vary. However, because credit history requires longevity, it does leave younger people at a natural disadvantage.
How Long of a Credit History Do You Need?
Credit history is important to improve your chances for loan approval. Lenders look closely at your credit history to determine how likely you are to repay your loan on time.
Lenders are taking a risk on any individual who requests a loan. Your credit history is the best indicator they have to assess your overall credit health and reliability.
A longer credit history shows you have more experience using credit, and this helps lenders be more accurate in the level of risk they take when lending to you. If you have a history of on-time payments, it indicates you’re likely to make your payments on time if extended credit.
If you have no credit history, the lender has no real basis for the decision. The catch-22 is that you need a credit history in order to get credit or a loan. This can make it difficult for first-time credit applicants to get approved for credit. In the next section, we outline ways to improve your credit history when you’re starting out.
How Can I Improve My Credit History?
Improving your credit health doesn’t happen overnight. One challenge with improving the length of your credit history is that you can’t speed up time.
Aside from paying your bills on time (in full, if possible) and reducing the amount you owe, there are other helpful ways to start building your credit history.
Become an Authorized User
When you become an authorized user, you’re added to someone’s credit card account. Usually, their credit history will be reflected on yours. This can help you get approved for your own account.
Be sure to ask someone you trust, like a family member or close friend, and make sure they have good credit. Some credit card companies don’t report authorized users, so before being added as one, you’ll want to make sure that credit card company reports authorized users to the credit bureaus.
Get a Secured Card
Secured cards are great for someone with no credit history. You put down a deposit with a credit card issuer, and that becomes your credit limit. You then use a credit card and pay it back each month.
Keep in mind these often get reported to the credit bureaus. Additionally, you’re more likely to get approved with no credit history since there’s less risk to the credit card issuer.
Get a Cosigner
If you’re applying for a loan with no credit history, you can get a cosigner. This should be a person you are close to with good credit. If you make on-time payments, this will help you build credit. Remember that if you default on your loan, your cosigner is held liable and this will also damage their credit.
Obtain a Credit Builder Loan or Student Loan
If you’re going to college, you can usually get approved for federal student loans without a cosigner and with no credit history. Otherwise, there are credit builder loans designed to help people with no credit build a credit history. These types of loans are usually reported to the credit bureaus and can help generate a credit score.
Length of credit history is important to your credit score and credit health. If you’re feeling overwhelmed or unsure about your credit, reach out to a qualified professional. They are there to help guide you through the process and make informed decisions.