You likely already know how important it is to build and maintain good credit. Having an excellent score can help you buy a car, become a homeowner and even get the job you want.
You probably also know a lot about the behaviors it takes to get that pristine score you’re after — paying your accounts on time, in full, and maintaining a low overall revolving balance, for starters.
But there’s one important factor in the credit score algorithm you have a little bit less control over: your length of credit history. Since having more time to track your activity gives lenders a better idea of your trustworthiness, the length of your credit history accounts for 15% of your FICO score.
Obviously, if you’re young and just establishing your credit, there’s not a whole lot you can do to improve this factor other than wait.
But there are a few rules you should know about how your length of credit history affects your overall score, as well as some easy mistakes to avoid on your way to achieving the credit score you want.
How Is a Credit Score Calculated, and Where Does Length of Credit Fit In?
First things first: While the length of your credit history does have an effect on your score, it’s far from the only factor — or even the most important. Although the age of your accounts is important, your payment history and the amount of open credit you’re using carry far more weight in the credit score algorithm.
Here’s the breakdown of how your FICO score is calculated:
- Payment history, including whether you pay on time or have any past-due or delinquent accounts: 35%
- Credit utilization ratio, or the ratio of used versus available revolving credit: 30%
- Length of credit history, our topic for today: 15%
- New credit accounts and hard credit checks made in pursuit of a new line of credit: 10%
- Credit mix, or the diversity of different types of credit lines you have, such as consumer credit cards, student loans, installment loans and mortgages: 10%
As you can see, length of credit history is a relatively small piece of the overall credit score pie. However, it gets a little bit more complicated when you factor in the 10% for new credit accounts — after all, if you’re just establishing your credit, all of your accounts will be new.
In short, the rules of the game pretty much preclude those brand-new to credit from having outstanding scores… which may seem unfair, but actually makes sense if you think about it.
The Seven-Year Rule for Establishing and Maintaining Good Credit
Here’s the thing: The whole point of your credit score is to give prospective lenders a quick and easy reference of your trustworthiness. It’s not a perfect system, of course, but it’s better than having to sit through an hourslong interview every time you’re trying to open a line of credit. (Although, spoiler: For major loans, like mortgages, you’re still going to have to put in some face time.)
But just like in real relationships, building trust takes time. And if you’ve only been using a credit card or paying a loan for a little while, lenders don’t necessarily know you’re going to continue on your good behavior.
So how much time does it take to establish good credit, exactly?
The important number to remember is seven years. That’s the “reasonable period of time” lawmakers settled on when they were drafting up the Fair Credit Reporting Act.
Seven years is how long it takes any negative factors, like delinquent accounts or public records, to fall off your credit report. And thus, it’s also the minimum length of time it takes to establish an excellent score.
Although you might have good credit while your accounts are still young, it’s highly unlikely you’ll hit 800 or higher, even if you always pay on time — and even if you do have a great credit score, some lenders may choose to refuse your application based on short length of credit history alone.
Length of Credit History vs. Credit Age: What’s the Difference?
You may have heard people refer to both their length of credit history and their credit age. What’s the difference between these terms, and how does that difference affect your own credit journey?
- Length of credit history refers to the amount of time a specific account has been open. Confusingly, though, it’s also used to refer to the FICO score calculation category we’ve been talking about in this post.
- Credit age, on the other hand, refers to an average: The bureau finds the mean length of credit history for all your open accounts. In short, your credit age is used to calculate the 15% of your score that’s tied to your length of credit history.
FICO tries to take as much information into account as possible when calculating the 15% of your score based on credit longevity, including, according to MyFICO, the following:
- The overall length of your established credit history, including the age of your oldest and newest accounts as well as the average age of all of your accounts combined
- How long specific credit accounts have been established and reporting activity to the bureaus
- How long it’s been since you’ve used specific accounts
So what does that mean for credit score best practices? What should you do to maximize your overall credit age?
What Happens When You Close a Credit Account?
Let’s say you have three lines of credit: your first credit card, your student loans, and an installment loan you took out to buy a car.
Say you’re 22 years old. You got both the credit card and the student loans when you were 18, and opened the personal loan this year. You pay off your credit card and decide you don’t want to use it anymore — so you close the account. That’s a good thing, right? Only spending money you actually have?
Well, when it comes to your credit history, not really. By closing the account, you’ve taken away a third of the information the bureaus can use to calculate your credit score. And since all of your credit lines are so young, you’ve also shortened your overall credit age:
4 years (credit card history) + 4 years (student loan history) + 1 year (car loan) = 9 years, divided by three factors, giving you an average credit age of 3 years.
But when you take away the credit card, it looks like this:
4 years (student loan history) + 1 year (car loan) = 5 years, divided by two factors, giving you an average credit age of 2.5 years.
It’s not a big difference in this simplified example, and the bigger impact on your score will probably come from the change to your credit utilization ratio. But even if you’ve paid off a credit card, it’s often a good idea to leave the account open, particularly if you’ve had it for a while.
It’s also important to actually use the accounts you have — although, obviously, not to the extent where you’re taking out heaps of debt you can’t repay. Banks will sometimes automatically close an account that’s been inactive for a while, which could have the same effect on your length of credit history as voluntarily closing the account. So if you have multiple credit cards, be sure to use all of them, at least every once in a while!
How to Build Credit from Scratch
So, how can you build a robust credit score when you don’t have a lengthy credit history for lenders to reference?
Although it can seem like an impossible system to break into, there are a few shortcuts to establishing credit as a total newbie:
- Credit-builder loans are a popular option. They’ll report payments to the bureaus while stashing the cash in a CD or savings account, and once the loan is paid off, the money is right back in your hands.
- Using a secured credit card is a great way to get a credit file started, though some carry higher fees than other types of cards — and some don’t report to the bureaus, so watch out!
- Piggybacking on an existing credit user’s account, i.e., swiping mommy’s credit card, can help establish a credit file if the account owner makes you an authorized user. Of course, it’s imperative that you use this tactic cautiously, because your actions also affect their credit… and vice versa!
Building credit might seem like a Sisyphysian task, but everyone you know with a stellar score started somewhere. With patience and persistence, it’s totally possible… and if you have yet to jump in, right now is the best time to get that seven-year clock started.
Jamie Cattanach (@jamiecattanach) is a freelance writer focusing on travel, personal finance and living well. Her work has been featured at Fodor’s, Yahoo, SELF, The Motley Fool, Roads & Kingdoms and elsewhere.