Credit and credit history length. Credit can be so frustrating. I get it. In the past, I have had horrible credit and I have scratched and clawed to improve it. So if you are struggling with your credit report right now, I get it. I’ve been there. But if you follow my instructions and work through the steps that I have outlined, your credit score will improve drastically!
There are a lot of different factors that go into your credit score and your credit report. To get a brief overview, read my article about the parts of a credit report. In this article, I will be focusing on credit length and explaining how your credit length will affect your credit score and how closing accounts affect your credit report. Let’s dive in!
(1) Parts of Your Credit Report
There are five main parts of your credit report. Some parts account for more of your credit score than others. But they are all really important.
- Payment History (35%)
- Amounts Owed (30%)
- Credit History Length (15%)
- Credit Mix (10%)
- New Credit (10%)
As you can see, not all factors hurt or help your credit score or credit report equally. For example, if you have a bunch of collection accounts but haven’t applied for new credit recently, your credit score will suffer. This is because a collection account hurts WAY more than the avoidance of applying for new credit helps.
While there are other articles about how to increase your credit score, let’s focus on the 15% of your credit score that is your credit history length.
(2) What is Credit History Length?
Credit history length is simply the average length of time that you have open credit. It accounts for 15% of your overall credit score.
It’s really as simple as that. I’ll do my best to make sure that I don’t make it more complicated than that while explaining how it works.
The best way to explain what your credit history length is is by using a few different examples.
Example #1: Dave
Dave is 22 and just graduated college. He has three credit cards that have been opened for 1, 2, and 3 years respectively. He also has a car loan that has been open for 1 year. To find Dave’s, simply find the average amount of time that Dave has had his open credit lines.
In this case, Dave has a credit history length of 1.75 years. [(1+2+3+1)/4]
Example #2: Jackie
Jackie is 35 and is married and has two children. She has three credit cards that have been opened for 1, 8, and 9 years respectively. She also has a car loan for 3 years and a mortgage for 10 years.
Jackie’s credit history length is 6.2 years. [(1+8+9+3+10)/5]
Example #3: Kathy
Kathy is 56 and is looking forward to retiring in a few years. She has three credit cards that have been opened for 3, 5, and 23 years respectively. She also has a mortgage that she has had for 16 years.
Kathy’s credit history length is 11.75 years. [(3+5+23+16)/4]
That is pretty much it as far as how to calculate your credit history length. It’s not too difficult.
Creditors generally want to see a borrower with at least 2 years of average credit history length although sometimes companies will often make exceptions. Creditors like to see a longer credit history length because it shows more stability with the borrower and a greater timeframe of paying back the lenders.
But what happens if you close one of your credit lines? What happens if you decide to close a credit card, pay off a car, pay off a student loan, or even pay off your mortgage?
(3) What happens if you close an account?
If you close an account you simply take that out of the equation of your average credit history length. (We’ll look at examples in just a minute.)
Be careful when deciding to close an account because it can negatively affect your credit score (not always though). When deciding to close an account, be aware that it could bring down your credit score for a little while (although it will recover in a few months).
If you are thinking about closing an account, it may require a little bit of critical thought before you actually do it. But at the same time, don’t think twice before you pay something off and close the account if that account is a hindrance to you and your financial wellbeing.
For example, if you have a car loan and want to pay it off, DO IT! The same goes for student loans, unsecured loans, and any other loan that is not a revolving line of credit (like a credit card).
DO NOT keep a student loan around and avoid paying it off early because you are afraid that your credit score will drop. Like I said, your score may drop for a little bit but it will quickly recover. And even if your credit score does temporarily drop, it is far better to have that student loan out of your life than to keep it.
Also, remember that your this part of your credit report is only 15% of your overall score. It is far more important that you keep your bills out of collections, and pay your bills on time.
As far as cars are concerned, lenders know that those are not loans that you will have for a long time. They understand that most people will pay off their car in 4-7 years. They don’t expect that you keep a car payment for 10-15 years. That would be silly.
So what happens if you want to close a credit card? That is where some critical thought comes in.
Let’s look at the examples from before.
Example #1: Dave– He has three credit cards:
- Card #1- 1 year of credit history length
- Card #2- 2 years of credit history length
- Card #3- 3 years of credit history length
Most lenders are going to understand that because Dave is so young that he isn’t going to have a very long credit history length. So if Dave decided to close any of his three credit cards it wouldn’t matter very much. His credit score probably wouldn’t drop at all because he has had each card for such a short time.
But if we want to split hairs, it would be best for him to close Card #1 because it has been open for the least amount of time.
Example #2: Jackie-She has three credit cards:
- Card #1- 1 year of credit history length
- Card #2- 8 years of credit history length
- Card #3- 9 years of credit history length
Jackie is a little different than Dave. Because she has two cards that have been open for significantly longer than the other her option is pretty clear. If she is going to close a card, it should be card #1. If she closes card #1 her length will actually increase. But if she closes card #2 or #3 it will lessen her average credit history length.
Example #3: Kathy-She has three credit cards:
- Card #1-3 years of credit history length
- Card #2-5 years of credit history length
- Card #3-23 years of credit history length
In Kathy’s case she would be okay to close either card #1 or card #2 (but card #1 would be the best choice). She hasn’t had either one of them for that long compared to her other accounts. But she should NOT close card #3. She has had card #3 opened since the Clinton administration. If she closes that card her average credit history length will decrease by a lot. This will hurt her credit score.
But remember, even though it will hurt her credit score, it won’t be for too long.
Final Thoughts
When it comes to credit history length it is important to be mindful of yours but at the same time, be careful to not get wrapped up in the “credit score game”.
It is important to maximize your credit score, but don’t maximize your credit score at the expense of your wallet. Don’t keep open accounts just to increase the age of your credit history.
Also, if you are not paying your credit cards off EVERY MONTH, don’t worry about your length and once you get them paid off, close them. As I’ve said many times before, if you can’t pay off your credit cards EVERY month then you aren’t financially mature enough to have them in the first place.
I know that can sound harsh. But it’s true. I say it because I care about you. I want everyone who reads my articles to succeed in life, financially and otherwise. And sometimes telling people the harsh truth is the way that you can love them the most.
Until next time!
0 Comments