In my previous installments, I talked about two crucial factors that make up a healthy or unhealthy FICO score--Payment History and Utilization Rate. These two factors amount to 65% of the FICO formula, so the other three cannot be as important, right?
Well, yes and no.
Let's remind ourselves what the three remaining components are:
Length of Credit History--15%
Types of Credit Used--10%
Even though the Length of Credit History only amounts to 15%, it is a very important factor that influences lenders' decisions beyond the FICO score. You may have a very good to excellent credit score, and still be denied a credit card because, guess what--you credit file is too thin.
Here, we are getting into a murky, not to say mysterious territory since every lending institution uses their own criteria to evaluate applicants. While Citibank can deny you an access to certain credit cards based on your short credit history, Chase or American Express might welcome you with open arms. Or the other way around, you just don't know.
What you do know, however, is that there are common traits among all lenders. Every lender that doesn't deal exclusively with the subprime market, values good and a long credit history more than good and short credit history. That should come as no surprise.
Where there lies a confusion, however, is the jargon. Length of Credit History is not the Average Age of Accounts. Consumers often use these two values interchangeably, but
they are not. The Average Age of Accounts (AAoA) is the part of the Length of Credit History, but it's not the same thing. Imagine two scenarios, if you will.
You opened your first credit card or received a student or any other kind of loan 10 years ago. Your Length of Credit History (LoCH) is 10 years.
You opened your first credit card or received a student or any other kind of loan 10 years ago. Since then you have opened and closed a number of credit cards. Your AAoA will be the fraction of the LoCH; it may be five or three years, or maybe even less.
LoCH is more important between the two. It shows that you are an experienced, consistent and responsible borrower. Banks will be willing to loan your money on better terms because you constitute a lower risk. A credit card issuer will be willing to give you their best credit cards with favorable (well, relatively) rates, as well.
Does it mean that we can disregard AAoA entirely? Well, no. A good practice is to keep your oldest credit cards intact. You don't have to use them if you don't want to, but it is a good idea to charge them at least twice a year, so your creditor doesn't cancel them on their own volition. Just pay for a parking or a cup of coffee every now and then.
Having said that, keep your old credit cards only if they are free. If you have an annual fee card that you have no use for, do not keep it open just to help your AAoA. AAoA considers all your accounts, opened and closed. Until your account falls off (usually 10 years for a credit card) it will still help with your AAoA even if you close it. Even then, I have a 20-year old LoCH and only 5.5 years of AAoA and I don't hear the word no from lenders very often (if ever). Take a good care of other important components of your FICO score and you will be fine!
To be concluded.
This is a post by Andy Shuman, a credit and travel expert who blogs at www.Lazytravelers.net. He writes and blogs during and between trips that he enjoys free of charge mostly due to creative use of credit card offers. He believes that credit cards are much more than just a convenient way to pay for a purchase, and that the benefits of responsible credit habits can go far beyond getting the best rates for loans and mortgages.
Andy is the author of bestselling books from Lazy Traveler Handbook Series available on Amazon. When he's not traveling, he lives with his beautiful wife and daughter in Brooklyn, NY.
Questions? Suggestions? Keep them coming!
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