What is Age of Accounts and Credit Age – Why Does it Matter?
There are several things that banks look at when you are applying for credit. One of the deciding factors in credit approval is your credit score. Banks provide information to credit bureaus on your borrowing habits. Credit bureaus then take that information and provide a credit score rating. A high score shows banks that you are a low credit risk, and that loaning money to you is likely to come back. A key component of your credit score is the length of credit history credit age of accounts. Your credit history helps lenders determine the risk banks take when lending to you.
How Credit Score and Credit Age of Accounts Impact Credit Approval?
Using credit is a large part of life in today’s age. Credit cards are common to find, but the big things are auto and home loans. When making large purchases, your credit rating, and credit mix matters. A good credit score rating means more banks are willing to provide you credit. Many banks have a minimum credit rating required. Your credit score also impacts the rate that lenders will offer you.
How you handle credit is a large factor in your credit rating. Approximately 35 percent of your score is based on your payment history. When you pay your bills on time, your credit score reflects these good credit habits. If you are delinquent on an account, or you miss payments, these bad habits lower your score.
Part of your credit score is the length of credit history. This factors in the fact that long-term habits take time to demonstrate. The longer your length of credit history is the more certain lenders are that they will get their money back. They need to balance the risk of lending money to you, with the reward of interest and other fees.
Credit Age and What Length of Credit History Tells Lenders
Time builds a higher length of credit history. This factor accounts for 15 percent of your FICO credit score. Even with good repayment habits and no delinquencies, your fair credit score will remain low until you have a higher credit age. It takes time to go from fair credit to good credit.
The reason for this is that banks still see you as a risk. Longer credit histories show banks and lenders that you have been managing your credit for a long time. When your average age of accounts is low, creditors don’t have that history to rely on. Even with prompt payments, low credit age means you are a higher risk.
However, after years and years of having accounts in good standing, a bank is more confident in your habits. You have shown that you manage your money appropriately. More importantly, it shows the banks that it is a sound investment to give you credit. Creditors use this past behavior to predict how likely you are to pay back the loaned money.
How Length of Credit History or Age of Accounts is Calculated
These factors, in order of significance, impact the length of credit history:
• Age of Oldest Account
• Average Age of Accounts
• Age of your Newest Account
The age of the oldest account is simply the age of your oldest credit account. It has a significant impact on your credit rating. Having one or two long-term credit accounts, such as a few credit cards, boosts your credit rating.
The average age of accounts is the average time that your credit accounts have been open. Your oldest accounts significantly impact the average age of accounts. Your newer accounts don’t make a large difference.
The age of your newest account shows creditors how many new accounts you have opened recently. These drop your average age of accounts drastically. As such, your credit score will be lowered significantly by these new accounts as well.
Knowing how your credit age is calculated helps you keep your credit rating high. Age of accounts helps get you approved for the loans you are after. Credit age also impacts the interest rates that banks are offering.
Credit Moves to Maximize Your Credit Age and Build Credit Score
Your credit age is based on the Average Age of Accounts. Your Average Age of Accounts increases with a few long-term credit accounts. Keeping an open credit account for years offsets the negative impact of opening new credit accounts. Of course, you need to have a good repayment history on these accounts. Keeping light and responsible credit use or credit utilization helps build up your credit rating.
It takes time to build up a strong credit rating. While it is frustrating, over the years, your FICO credit score will reflect your long-standing good habits. Your credit score increases, year after year, as your credit history increases.
Closing Credit Accounts Impacts Your Credit Age of Accounts and Credit Score
It is one of the common credit card myths that closing credit accounts has no bearing on your credit score. You may want to close out an account for a few reasons. High yearly fees are one reason you would want to get rid of a credit card. You also may find that the rewards offered are not what you had hoped. No matter the reason, it is important that you are careful when closing credit card accounts.
The older the account, the more of an impact it will have on your credit age. For this reason, you need to avoid closing your oldest card. The oldest account is going to be the primary driver to your length of credit history. Canceling your oldest account hits your credit score significantly. Keep your oldest account open, even if you are not using it.
The accounts that have been open for a little while are okay to close. Credit age is based on the average of your account ages. With averaging, removing an account at an age close to the average has little impact on your credit age. It is possible to close an account and have no impact on your credit score. As long as you’re not closing your older credit accounts, you are okay to trim accounts.
Credit bureaus look at numerous factors to rate the risk a lender takes when they issue credit to you. Your habits and the length of time you have been borrowing money are the basis of your credit score. The credit age of accounts of your credit history gives lenders an idea of how well you manage your money. The longer you have been paying your bills, the surer they are that it is a sound investment.