Your credit score is a crucial component of your financial health, influencing everything from loan interest rates to apartment rentals. While many factors contribute to your credit score, credit age, or the length of your credit history, plays a significant role. Understanding how credit age affects your credit score and learning strategies to manage it effectively can significantly improve your financial standing.
Understanding Credit Age and Its Impact
What is Credit Age?
Credit age refers to the average length of time you’ve had credit accounts open. It’s calculated by adding up the age of all your credit accounts and dividing by the total number of accounts. Credit bureaus use this information to assess your creditworthiness. A longer credit history generally indicates to lenders that you’re a responsible borrower who can manage credit over time.
Why Credit Age Matters
Credit age matters because it demonstrates your ability to handle credit responsibly over an extended period. Lenders prefer to see a proven track record of on-time payments and responsible credit utilization.
- Demonstrates Reliability: A longer credit history provides lenders with more data points to assess your risk.
- Impacts Credit Score: Credit age is a significant factor in credit score calculations, typically contributing to about 15% of your FICO score.
- Influences Loan Approvals and Interest Rates: A longer credit history can increase your chances of loan approval and secure lower interest rates.
- Example: Imagine two individuals applying for a car loan. One has a credit history of 10 years with a mix of credit cards and loans, while the other has only had a credit card for 6 months. The lender is more likely to offer the first individual a lower interest rate due to their longer credit history and proven track record.
How Credit Age is Calculated
Average Age of Accounts
The most common method of calculating credit age involves determining the average age of all your open credit accounts. This includes credit cards, loans, and other lines of credit.
- Calculation:
- Example:
- Credit Card 1: 5 years old (60 months)
- Credit Card 2: 2 years old (24 months)
- Auto Loan: 3 years old (36 months)
Total Age: 60 + 24 + 36 = 120 months
Number of Accounts: 3
Average Credit Age: 120 / 3 = 40 months (3 years and 4 months)
Impact of Closing Accounts
Closing credit accounts can have a negative impact on your credit age. When you close an account, it no longer contributes to your average credit age. This can shorten your overall credit history and potentially lower your credit score. While closed accounts remain on your credit report for up to 10 years, they do not actively contribute to your credit age calculation.
- Shortens Credit History: Closing older accounts reduces the overall age of your credit history.
- Affects Credit Utilization Ratio: Closing a credit card reduces your total available credit, which can increase your credit utilization ratio (the amount of credit you’re using compared to your total available credit). A higher credit utilization ratio can negatively impact your credit score.
- Tip: Before closing a credit card, consider the potential impact on your credit age and credit utilization. If it’s an old account, it might be better to keep it open and use it occasionally to maintain a positive credit history.
Strategies to Build and Maintain a Healthy Credit Age
Open Credit Accounts Early
The earlier you start building credit, the better. Consider opening a credit card or secured credit card while you’re young to start establishing a credit history. Even if you only use it for small purchases and pay it off in full each month, it can help build your credit age over time.
- Student Credit Cards: These are designed for students with limited credit history.
- Secured Credit Cards: These require a security deposit, making them easier to obtain if you have no credit or bad credit.
Keep Old Accounts Open
Even if you don’t use them frequently, consider keeping older credit card accounts open. As mentioned earlier, closing these accounts can negatively impact your credit age and credit utilization ratio.
- Infrequent Use: Make small purchases on these cards periodically to keep them active.
- Set Up Auto-Pay: Ensure you’re always paying at least the minimum balance to avoid late payments.
Avoid Opening Too Many New Accounts at Once
Opening multiple credit accounts in a short period can lower your average credit age and potentially decrease your credit score. Lenders might view you as a higher risk if you’re applying for credit frequently.
- Space Out Applications: Spread out your credit applications over time to avoid negatively impacting your credit age.
Be Patient and Consistent
Building a good credit age takes time and consistency. There are no shortcuts to building a long credit history. The key is to manage your credit responsibly over time, making on-time payments and keeping your credit utilization low.
Common Myths About Credit Age
Myth: Closing Old Accounts Doesn’t Matter
- Reality: Closing old accounts can significantly impact your credit age, particularly if they are among your oldest accounts. As noted above, they no longer factor into the average age calculation, and that will decrease it.
Myth: Only Credit Cards Affect Credit Age
- Reality: Credit age is affected by all types of credit accounts, including credit cards, loans, and lines of credit. Lenders evaluate your entire credit history when assessing your creditworthiness.
Myth: Opening New Accounts Will Quickly Improve My Credit Score
- Reality:* While opening new accounts can diversify your credit mix, it can also lower your average credit age, potentially offsetting any positive effects. Focus on managing your existing credit responsibly.
Conclusion
Credit age is a critical component of your credit profile that significantly influences your credit score and overall financial well-being. Understanding how credit age is calculated and implementing strategies to build and maintain a healthy credit history is essential. By opening credit accounts early, keeping old accounts open, and managing your credit responsibly over time, you can improve your credit age and achieve your financial goals.
