The duration for which you have been using credit makes a marked difference in your credit score. A long credit history with on-time bill payments proves to lenders that your credit behaviour will be similar in the future. Lenders and credit cardholders have more confidence in customers who have exhibited good credit behaviour in the past.
In this post, credit experts from CreditMantri walk you through the basics of credit history and how it impacts your credit score.
So, what exactly is credit history?
Credit history is a record of all your debts and payment history. In simpler terms, it’s a measure of how long you have been using credit. For most users, it’s calculated from the time when you take your first loan or start using your first credit card.
The credit history increases with time and as you open a new credit account. To better understand the credit history’s impact on your credit score, let’s know how it is calculated.
How is the length of my credit history calculated?
The length of your credit history can be divided into three parts:
- How long credit accounts have been opened
- How long have you held specific types of credit accounts
- How long since you last used these credit accounts
The easiest way to check your credit history is by requesting a copy of your credit report. CreditMantri offers you your latest credit report and credit score by providing a few necessary details regarding your finances.
Once you receive the copy of your credit report in your inbox, open it to find the length of your credit history. Your credit report will contain a detailed list of all your credit accounts, the date when each account was opened, and the last time you used it.
The key term to be aware of is the “Average Age of Accounts.” Credit bureaus arrive at the average length of your credit history using this simple calculation:
Average Age of Accounts = the sum of the ages of your oldest and newest credit accounts / total number of accounts.
As per this formula, if you have only one credit account, then the length of your credit history and your credit accounts’ average age are the same. However, since most people have several different credit accounts, the average age of accounts is calculated.
You can use the above formula to calculate your credit accounts’ average age using the info available on your credit report.
How does the length of my credit history impact my credit score?
The length of your credit history accounts for 15% of your overall credit score. The longer the credit history length, the better it is for your credit score.
Here are a few ways in which the length of your credit history impacts your credit ratings.
- Older credit accounts offer more weightage than younger credit accounts. Longer credit history has a positive impact on your credit score.
- Lenders prefer borrowers who have a track record of paying various credit obligations right on time. This is because, when it comes to new borrowers, it’s harder for lenders to predict whether they’ll repay their loans on time.
What’s a good credit history length?
There’s no fixed number. It all depends on your other financial habits as well. With that said, credit score surveys reveal that individuals with excellent credit (800 and above) have an average credit length of 8 to 11 years. However, it doesn’t mean you need to wait eight years before you can enjoy excellent credit scores.
It’s possible to build a good credit score in a far shorter timeframe by practicing good financial habits.
How to increase my credit history length?
Unlike other credit ranking factors, increasing credit history length is not under your control. With that said, here’s what you can do if you’re starting with a fresh credit slate.
Begin your Credit Journey and Wait
It’s not possible to establish your credit history length without using credit. So, if you’re stepping into the world of credit, then it’s time to get started. Get a credit card and use it responsibly. You can also consider a short-term loan to work on building your credit history.
If your credit scores (or lack of it) do not qualify you for a regular credit card, you can opt for a secured credit card. Secured credit cards are readily available for individuals with no or low credit scores. Using it lightly and settling the bills on time and in full, you can build your credit score and history.
Using credit accounts responsibly and paying your loans on time, you’re on the right track to building a positive credit history.
Mistakes that Hurt your Credit History Length
Knowing what not to do can help you avoid credit history mistakes that could hurt your credit score. Here are the biggest missteps to avoid:
- Opening too many new credit accounts within a short span
Keep in mind that when you open too many credit accounts simultaneously, you run the risk of lowering the average age of your credit accounts. This harms your credit score, as the average age of your credit accounts gets reduced.
- Closing an old credit card
It pays to exercise caution whenever closing an old credit card. Cancelling an old card reduces your available credit limit, which in turn increases your credit utilisation ratio. This hurts your credit score. When you close an old credit card, it erases the associated credit history from your credit score calculations.
The Bottom Line
Length of your Credit History Matters, but it’s slightly less critical than Other Factors
While credit bureaus consider the average age of your credit accounts for credit scoring purposes, you don’t have to worry about it a lot. Remember that credit history length is just one among several factors that impact your credit score.
While you can’t do much about your credit age, you can improve other factors under your control. By maintaining a strong on-time payment history and keeping your credit utilisation levels low, you can steadily build your credit score.
By using credit lightly and paying your bills on time, you’re on the way to build a good credit score. While having a short credit history may prevent you from achieving a perfect credit score, it’s not something that you can change overnight. Adopt good financial habits. Your credit history will sort itself out over time and help you build a good credit score and history.