One often overlooked part of your credit score is the length of your credit history. Most people don’t understand that this is an important part of how FICO determines your credit score.
FICO looks for accounts that are new in the past 6-12 months. This type of account can make the borrower look like a bigger risk for taking on new credit. FICO watches for signs that the consumer is overextending themselves by creating too much debt, so opening new accounts can work against you when you are trying to build good credit.
In general, a longer credit history helps boost your FICO score. This is a small component of the scoring model, though. It’s possible for young people or those with a few new accounts to have a healthy credit score.
The length of your credit history makes up 15% of your total FICO score. Lenders use this information to determine whether you’ll be a good credit risk when you apply for new loans and credit cards. If you have a higher FICO score, you are seen as being a safe risk to lend money to from the bank’s perspective. This means you’ll pay lower interest rates.
Here’s how the FICO credit scoring model breaks down the length of your credit history:
- How long your accounts have been open
- How long each individual account has been open
- How long it’s been since each account has reported new activity
You’ll need six months of account activity on one debt to have a FICO score. The age of your newest account, your oldest account, and the average of all of your accounts make up this component of your FICO score.
Before closing unused accounts, consider the impact it may have on your FICO score. If the credit card doesn’t have an annual fee, it’s a good idea to leave the account open, since this will keep your length of credit history intact. In addition, closing a credit card also affects your credit utilization ratio by decreasing your total amount of available credit.