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How credit history may work against young adults

Nick DiUlio

September 12, 2013

The length of your credit history makes up a relatively modest 15 percent of your FICO score. And, when you're young and just starting out with credit, there's not much you can do to make that percent work in your favor.

Yet understanding what goes into FICO's length-of-credit-history calculations can help you hone your score over time — and make decisions that will prime it for perfection.

Here are some tips for managing this particular aspect of your credit history.

FICO facts
FICO uses five categories to determine an individual's credit score: payment history, amounts owed, new credit, types of credit used and length of credit history. Length of credit history is the third-heaviest weighted factor, behind payment history and amounts owed. It rewards those who manage credit well over a long period of time.

“'Length of credit history is a factor that's been used since FICO came up with its original scoring model back in the 1950's,” says Randy Padawer, vice president of credit repair services at Utah-based financial advisory firm Lexington Law. “And it's a category that makes a lot of sense. The more experience a consumer has managing credit, the less likely that person is going to default on his or her loans.”

How does FICO determine length of credit history?
According to Linda Ferrari, a California-based credit score expert and counselor, several factors are considered when determining the length of your credit history:

  • How long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts.
  • How long specific credit accounts have been established.
  • How long it has been since you used certain accounts.

These various factors have been proven to predict various levels of risk, says FICO scoring expert Frederic Huynh.

“What we tend to see is that the older the age of the oldest account, the less likely it is that person will default on his or her credit obligations,” says Huynh. “Likewise, when we look at the average age of accounts, we see time and time again that consumers who have a higher average length of credit history perform better across the board.”

The downside of being young
If FICO favors experience over youth, what does that mean for young people just beginning their credit journeys?

“This can certainly prevent young people from scoring in the highest possible range in this particular category,” Huynh says. “But it's very important for people to remember that a FICO score is based on many other variables. So just because a consumer is young doesn't necessarily mean he or she is destined for a low credit score.”

Huynh adds that 33 percent of people between 18 and 29 have FICO scores above 700. Impressive, considering the best possible score is 850.

Young consumers looking to counterbalance their lack of history need to start forging a lengthy credit history as soon as possible, according to Eric Lindeen, marketing director for financial consulting firm Zoot Enterprises.

“You can't fake experience, so young consumers need to start early,” Lindeen says.

One way to do that is to get a card as soon as possible that you plan to keep for the long haul — at least several years. Don't cancel it until you've built up history on another card.

Because there's nothing they can do about their age, young consumers should also work extra hard to improve other aspects of their credit scores to offset the disadvantages of having a short credit history, says Kevin Gallegos, vice president of Phoenix operations with Freedom Financial Network.

Gallegos recommends doing three things, which are possible at any age:

1. Pay every bill on time, every time. Payment history makes up 35 percent of your FICO scores.

“On-time payments on a student loan or car loan, and on rent, phone, Internet and utility bills can help build a positive credit history,” Gallegos says.

2. Pay down debt as fast as you can. Gallegos suggests minimizing the amount of credit you're using and maximizing credit available. FICO rewards those who carry a debt load that's far less than their available credit. So add up the credit limits across all your cards, and endeavor to keep the amount you charge as low as possible.

“Anything over 35 percent is considered high and can negatively impact credit scores,” says Gallegos. “More than 50 percent will have a definite negative impact on a credit score, and a maxed-out card will definitely impact the score in a negative way.”

3. Pay credit card balances in full every month: “Learn to live within your means,” Gallegos says. “If you can't pay off in full what you charge each month, don't buy it and don't charge it.”

To close, or not to close an account — that is the question
You've got an old card you want to get rid of. But will that shorten your credit history and damage your FICO score?

First, it's important to understand a critical point: Closed accounts that were always paid on time will remain on a credit report for 10 years after the date of closure. Meanwhile, accounts with late payments will remain for seven years from the date of the first delinquency.

“This is an important distinction when talking about length of credit history,” Padawer says. “And that's because FICO bases length of credit history on the opening date of the oldest reported account, which means closing older accounts can eventually degrade this aspect of your credit score.”

For instance, if you've had your oldest credit card for 10 years, and your second-oldest for two, your credit history (in FICO's eyes) is 10 years long. If you cancel the card you've had for 10 years, it will eventually disappear from your credit report (after seven or 10 years, depending on whether the account was paid as promised). When it does, you'll have shortened your credit history by eight years.

“This is one of the many points of unfairness consumers are burdened with when it comes to credit scoring. And it's bizarre, because your date of birth doesn't shift. Where you were born doesn't shift. But your length of credit history can shift if you close out old accounts,” says Padawer.

Huynh agrees, adding that closing a long-held credit card account is “never a good short-term strategy for improving your credit score.”

That doesn't mean you have to keep every card you open throughout your life. According to Lindeen, the average age of one's credit history is far less important than the total length of time he or she has used credit. So, if it makes sense for your particular circumstances, try to keep your oldest accounts open as long as possible and simplify your credit portfolio by axing newer cards. In order to avoid a card issuer closing an inactive card, Padawer says it's wise to make small charges every few months to any cards you want to keep open and pay them off in full at the end of the billing cycle.

“In the end, if you're going to close a card, consider closing one of your newest cards that has a low line of credit,” says Padawer. “There's no real financial imperative to close accounts because it doesn't look favorable to the banks. They don't want folks who are gone too quickly. They want long-term, profitable customers with long histories of credit.”

Ultimately, though, which cards you decide to keep open should depend on your comfort level — and your ability to responsibly juggle multiple accounts. Closing an old card that tempts you, that you never use or that costs you a hefty annual fee may be better for your finances in the long run than keeping it open to bulk up one single facet of your FICO score.