Your credit age is the average amount of time your accounts (credit cards and loans) have been open. Although your real age isn’t a factor in your credit score, having a lengthy credit age matters. A high credit age is of medium importance when it comes to your credit score. Low utilization, on-time payments, and no derogatory marks are more important than credit age, while the number of accounts you have and the number of hard pulls are less important.
Having an account for a long period of time is one sign of a low risk; thus, it leads to a higher credit score. Even if the rest of your credit report looks spectacular, your credit age may be leading to a low score and, unfortunately, it’s one of the harder things to improve.
Accounts on your credit report have an opening date associated with them, which is when the account was established. Add up all the time since each account on your credit report was opened, divide by the number of accounts, and voila: You’ve calculated your credit age. The general rule of thumb is that fewer than five years is a bad credit age, while more than seven years is good.
Closed accounts continue to appear on your credit report, age, and impact your credit score long after they’re closed. A credit-card account may be closed due to a lack of use or at your request. Loans are considered closed accounts when they’re paid in full. Both credit cards and loans may be closed and sold to a collection agency due to lack of payments.
Typically, accounts closed with some negative marks (late payments or otherwise) remain on your credit report for seven years, while accounts closed in good standing and with no negative marks remain for 10. Why? This enables good accounts to positively affect your credit score for a longer period of time, while bad accounts negatively affect your credit score for a shorter period of time.
So how can you maximize your credit age? First, don’t close any existing accounts if at all possible. Doing so won’t negatively impact your credit score immediately, but years down the line when that old account is removed from your report, you might see a drop in your credit score. Additionally, closing an account will likely lead to an overall reduction in your total number of accounts, as well as increase your utilization — both things will lead to a lower credit score.
Depending on your long-term outlook in terms of credit cards and especially if you’re younger, it may be advantageous to open more accounts. Not only does this increase your total accounts and lower utilization, but it also sets you up in the future to have a nice credit age.
Be warned, though, that opening new accounts, especially if you have few existing accounts, can severely impact your credit age and credit score immediately, although it will recover over time. For instance, suppose you have only one credit card account that was opened 10 years ago and no loans. You open a new credit card, so your credit age is now (10 + 0) / 2 = 5 years, which drops you from an excellent credit age to an average credit age. On the other hand, if you have five credit cards with an average credit age of 10 years and open an additional credit card, your credit age is now (5 x 10 + 0) / 6 = 8.3 years, still very good.
Definitely don’t open new accounts if you anticipate obtaining an auto or home loan in the near future. The credit-score impact of the hard pull, along with the drop in your credit age, can result in you getting worse rates than you would otherwise.
In my next post, I’ll let you in on a quick way to boost your account age, along with other credit-score components.
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Credit Factors: I think we can all agree that there should be some key points on how to evaluate one’s credit worthiness. I agree with Dr. Lou that this is a somewhat important factor, but not the highest in determining most of your score. Based on what is said through Kevin’s blog those who have gone through changes in their life should not be penalized. I don’t think this always happens though. Obviously someone moving or switching jobs doesn’t change your credit score. Now your ability to pay your debts and if you are late on them can lower your score. Isn’t that how things are supposed to work? I hear a lot of complaining about how credit reporting agencies are crooks and scams, yet I don’t here any solutions in these complaints. If you are critical of their process I would love to her how you think it should operate. It would give insight into your thought process in these matters.
On the efficacy of credit age as a metric: Credit age isn’t the best metric because it is not something people think about frequently. Most everybody at least implicitly understands that things like making your payments on time is a good thing. However when it comes to credit age it’s very easy for people to do things that hurt it. This is most likely why it’s considered a lesser factor and why it’s only one factor of many.
Could life changes lead to people doing things that lower their credit score? Absolutely. Perhaps a card is closed and a collection agency comes after you for non-payment. Perhaps you’re short on money and open a new credit card or utilize all of your credit limit. It makes sense to penalize these things. If they happened because people moved or changed jobs, then that’s unfortunate, but it does speak to responsibility in many (but not all) cases. Budgeted wrong and didn’t account for the cost of moving and your new higher mortgage payment? That’s something that a creditor wants to know.
Trustworthy/Predictive: Kevin, I do agree when you state it has nothing to do with whether someone is trustworthy. That’s not what credit reporting is about. There are lots of honest, trustworthy people that can’t pay their bills or are late often due to circumstances beyond their control. It comes down to how consistent and predictable someone will be with paying on time and keeping a low balance. These changes in life you mention do happen but even if it does lower your credit, that doesn’t mean you can never come back from it. Credit scores are basically a gauge on the risk of that person to loan them money. Nothing more, nothing less. I still welcome you to explain how you think a fair credit reporting system would act. Thanks for reading, and thanks to Dr. Lou for providing this information to everyone.
Credit age and other misconceptions: Kevin, credit card age and number of accounts open are not HUGE black marks as you state. If your average credit age changes from 6 years to 4 years, you will lose a handful of points on your credit score. The same with number of accounts. They are very minor contributors. Several websites have credit score modelers that show the effects of change on your credit score. Both credit card age and number of accounts are small contributors. Missing a payment is a huge contributor. Again, the stuff you are writing may have been true 30 years ago but is not true today. You are contributing to the huge amount of misinformation that is out there. Credit utilization is way more important than credit age or number of accounts. I don’t know why you keep bringing up things that MAY have been true 30 years ago.
Responsibility, credit score, and creditors: There’s no requirement that if you have life changes (job, moving, school, marriage, etc.) that you MUST take a credit hit for it. Approximately 20% of people have credit scores over 800. Most of these people are not super rich, they do move, and they do change jobs.
If life changes cause someone to do things that make their credit score significantly drop then in MOST cases that signifies that they are more of a risk to creditors. Do you move every 3 years and forget to pay your bills for a couple of months? When you change jobs do you start maxing out your credit cards? To a creditor it doesn’t matter WHY they happened, just THAT they happened.
Does it make someone a bad person if they are living paycheck-to-paycheck with little or no savings and then they lose their job? Absolutely not. However, budgeting responsibly, saving money, and having an emergency fund is a sign of responsibility. Creditors understandably want to know if you are responsible.