18-Jul-2018 written by : FSI-Team
Building a good credit score requires a lot of time and patience. It doesn't happen overnight. One needs to take care of all the factors that affect the score and work towards ensuring that they positively affect the calculation. Since payment history and credit utilization ratio together affect 65% of the score, one needs to establish a pattern of regular on time payments and keep low utilization levels on credit cards to ensure a good score. Apart from these two main factors, does the age of credit cards determine the score too?
Absolutely. The length of the time that you have been using credit does affect your credit score. When two people have a clean track record of on time payments and low utilization, then the person with a longer length of the credit history will definitely have a better score than a person who has just started building credit. That's because while making lending decisions lenders see your past experience in handling credit. If you have a long track record of responsible credit behaviour it helps in building trust among lenders that you will behave in a similar fashion in future too. The credit scoring models use the average length of your credit history during the score calculation. So the longer the accounts are reported in the credit report, the better it is for your score. But remember, credit age isn’t everything. If your credit report shows that you have several missed payment records or maxed out credit cards then a long credit history will not be able to single handedly raise your score.
So now that you know, that credit age matters during the score calculation, you must be wondering what you can do about it than just wait patiently for time to pass. Well you can atleast ensure that you keep your old accounts open, especially the ones in good standing. If you were thinking of closing some of the old accounts to clear the cluttered credit report with too many accounts, think twice. Closing out old credit cards, especially the ones that you have used responsibly will lower your score.
Firstly, it will bring down the average length of the credit history and secondly it will reduce the amount of available credit. This will have a direct impact on the utilization rate. Since the credit limit of the closed card will no longer be used for utilization calculations, the percentage of available credit that you are using will increase. As the utilization ratio increases your credit score will be impacted negatively.
To ensure that your old credit cards work positively for your score, you must keep them active by charging a few expenses every month. Do not carry balances on these cards. Refrain from opening new credit cards, because they lower the average age of your accounts.
A lengthy credit history with a good track record enables the lenders to measure your creditworthiness accurately. Old credit cards that you opened long back will help raise your score. So unless you need to pay a hefty annual fees on the card, we recommend that you keep the card open. That said, it isn’t the most important factor that you need to take care to raise your score. No matter how long your experience in dealing with credit is, it is how you pay and how much you owe that matters the most.Consistent behaviour through the years will help you build a rich credit history.