Length of Credit History
Length of credit history refers to the duration for which an individual has held credit accounts. It is a fundamental component within the broader field of credit reporting and is a significant factor in determining an individual's credit score. This metric assesses how long a person has been actively managing various forms of debt, including the age of their oldest credit account, the average age of all their accounts, and the age of specific account types like revolving credit (e.g., credit cards) and installment loans (e.g., mortgages, auto loans). A longer credit history generally indicates to lenders that a borrower has extensive experience managing financial obligations responsibly.
History and Origin
The concept of evaluating a borrower's reliability through their financial past has existed for centuries, but the formalization of "length of credit history" as a specific data point within a standardized scoring system is a more modern development. Early forms of credit assessment relied on personal relationships and local merchant reports. The modern credit reporting industry began to take shape in the mid-19th century with agencies collecting data on individuals and businesses. The introduction of the FICO score in 1989 by Fair, Isaac, and Company marked a pivotal moment, standardizing the algorithm used to evaluate credit risk. This system explicitly incorporated factors like the length of credit history, recognizing its predictive power in assessing future payment behavior. The development of such scoring models was driven by the need for a consistent and objective method for lenders to evaluate risk as lending became more widespread and less localized.11,10
Key Takeaways
- Length of credit history measures how long credit accounts have been open and actively managed.
- It is a significant factor in calculating major credit scores, such as FICO and VantageScore.
- A longer, well-maintained credit history generally contributes to a higher credit score.
- The metric considers the age of the oldest account, the average age of all accounts, and the age of specific account types.
- Establishing and maintaining credit over time is crucial for building a strong financial profile.
Interpreting the Length of Credit History
When a credit bureau generates a credit report, the length of credit history section provides a snapshot of how long an individual has engaged with credit. Lenders interpret a longer, positive credit history as a sign of financial stability and experience. It suggests that the individual has successfully handled various credit obligations over an extended period, reducing the perceived risk for new loans or lines of credit. Conversely, a short credit history, especially for younger individuals or new borrowers, can be seen as an unknown, potentially leading to higher interest rates or stricter lending terms due to limited data on repayment behavior.
Hypothetical Example
Consider two individuals, Alex and Ben, both applying for a new credit card.
Alex:
Alex opened their first credit card at age 18 and consistently used it responsibly, making all payments on time. They are now 35 years old and have maintained that original card, along with a few others opened over the years and an auto loan that has been fully repaid. Alex's oldest account is 17 years old, and their average account age is 10 years.
Ben:
Ben is also 35 years old, but only opened their first credit account, a small personal loan, three years ago. While Ben has managed this loan perfectly, their oldest account age is 3 years, and their average account age is similarly low, as they have few other credit products.
In this scenario, Alex's longer length of credit history, spanning 17 years of responsible borrowing, presents a much stronger financial profile to lenders compared to Ben's relatively short 3-year history. Lenders would likely view Alex as a lower risk, potentially offering more favorable terms.
Practical Applications
The length of credit history is a critical factor in numerous financial decisions. When applying for a mortgage, an auto loan, or even renting an apartment, lenders and landlords will often scrutinize this aspect of an individual's credit file. A robust history can lead to lower interest rates and more favorable terms, significantly impacting the total cost of borrowing. For instance, a strong credit history, which includes a substantial length of credit history, can make a difference in the interest rate offered on a mortgage loan.9 Beyond lending, some employers may consider credit history as part of their background checks, particularly for positions involving financial responsibility, though this practice is subject to regulations like the Fair Credit Reporting Act.8 Furthermore, utility companies and insurers may also review credit history when determining service eligibility or premium rates.
Limitations and Criticisms
While a longer credit history is generally beneficial, the emphasis placed on it by credit scoring models has faced some criticisms. One common critique is that it can disadvantage younger individuals or recent immigrants who may not have had sufficient time to build an extensive credit history, regardless of their financial responsibility or income. This can create a "credit Catch-22" where it's hard to get credit without a history, and hard to build a history without credit.7 Additionally, some argue that the current credit scoring system, which heavily weighs factors like the length of credit history and homeownership (which establishes a lengthy repayment record), can inadvertently perpetuate existing economic inequalities. For instance, the system may disproportionately affect minority groups who have historically faced barriers to accessing credit and accumulating wealth, thereby limiting their ability to build long credit histories.6,5 The Consumer Financial Protection Bureau (CFPB) provides resources on understanding how credit reports and scores impact financial well-being.4
Length of Credit History vs. Credit Utilization
Length of credit history and credit utilization are two distinct yet crucial factors influencing an individual's credit score. While both contribute to a person's overall creditworthiness, they measure different aspects of financial behavior.
- Length of Credit History: This factor, accounting for approximately 15% of a FICO Score, focuses on the duration of an individual's borrowing activity. It includes the age of the oldest account, the average age of all accounts, and how long specific types of accounts have been open. A longer history typically demonstrates established responsible behavior.
- Credit Utilization: This factor, which makes up about 30% of a FICO Score, measures the amount of revolving credit an individual is currently using compared to the total amount of revolving credit available to them. For example, if someone has a total credit limit of $10,000 and has used $3,000, their credit utilization is 30%. Lower utilization rates (generally below 30%) are seen favorably by lenders, indicating that an individual is not over-reliant on borrowed funds.
The key distinction lies in what they assess: history examines the duration of credit relationships, while utilization examines the proportion of available credit being used at a given time. Both are vital for effective financial planning.
FAQs
What is considered a good length of credit history?
Generally, a credit history of seven years or more is considered good, while a history exceeding 10 years is excellent. However, even a few years of consistently positive payment history can establish a respectable foundation for your credit score.
Does closing old accounts hurt my length of credit history?
Closing an old account can potentially reduce the average age of your accounts, especially if it's one of your oldest. This can have a negative impact on your credit score over time, particularly for your credit mix and overall score. It's often advisable to keep older accounts open, especially those with no annual fees, even if you don't use them frequently, to maintain a longer average credit age.
How can I establish a long credit history if I'm new to credit?
If you are new to credit, consider starting with a secured credit card or becoming an authorized user on a trusted family member's long-standing account. Making timely payments on student loans or small loan applications can also help build your history over time. Consistent and responsible use of credit is the most effective strategy.
Does checking my own credit report affect my length of credit history?
No, checking your own credit report or credit score, known as a "soft inquiry," does not negatively impact your length of credit history or your score. These inquiries are not visible to lenders. Only "hard inquiries," typically initiated when you apply for new credit, can temporarily affect your score, and even then, only minimally.3
What percentage of my credit score is based on length of credit history?
The length of credit history accounts for approximately 15% of your FICO Score. Other major factors include payment history (35%), amounts owed (30%), new credit (10%), and credit mix (10%).2,1