If you are working to improve your credit score, it is vital that you know exactly factors influence the outcome. While providers of different financial products and services have their own variations of the credit score, and tweaks to the formula, overall there are some things you can expect. The most important aspects of your credit score are your payment history and your credit utilization. Together, these items account for 65% of your credit score. The next largest chunk is the length of your credit history, which accounts for 15% of your credit score.
Length of Credit History Matters
While the length of your credit history isn’t weighed as heavily as payment history or credit utilization, 15% isn’t something to sneeze at. Indeed, if you are just on the cusp between fair credit and good credit, your history could mean something. The length of credit history is one of the reasons I still have my first credit card — even though it is a student credit card that doesn’t offer rewards, and that has a little higher interest rate than my other cards.
When considering the length of your credit history, there are a couple of things that go into the equation. The age of your oldest open account is considered to some degree. However, “average age” of your credit accounts is a very important factor. So, if you have a credit card that you opened 10 years ago, and one that you opened 2 years ago, the average age of your credit accounts is 6. If you open a bunch of accounts in an effort to increase your available credit, it is likely to backfire on you to a certain degree, since you will just have a lot of new accounts, and it will throw off the average age of your credit.
You should also understand that just having a credit account sitting there, with no activity, can be a problem. A card that has been idle for years may not do much for your credit score, since it hasn’t been used, and can’t really provide an accurate look at your credit habits. In order truly use old credit accounts to best effect, you have to actually use them on occasion. This really isn’t much of a problem if you plan to use your credit cards carefully. Make sure you use each of your cards a few times a year, paying off the balance so that you don’t have to pay interest.
Playing it Smart
Unfortunately, the credit scoring system doesn’t reward you for the most responsible financial habits; it’s designed to force you to use credit. And our financial system relies heavily on credit scores, so paying attention to your score is important. This means that you have to play by the rules to a certain extent. There is no way to know completely what is going in to your credit score, since FICO and other financial service providers keep the specifics secret. However, with some carefully planning, and attention paid to the way you use credit, it is possible to improve your score to the point where it is excellent.
Image source: Michiel1972 via Wikimedia