Credit Improvement – When Old Accounts Matter
written by Credit-HQ ExpertThe various elements that go into the credit scoring system have been worked out after extensive research and testing by statisticians and credit experts. The result is a very sophisticated modeling device that can evaluate your credit and other pertinent things about you and produce a numerical score that accurately gives any potential lender a good feel for whether you are a good credit risk or not. While the various aspects of the formula undergo constant review, at this point, it looks like the basic structure and what goes into those algorithms is pretty much set in stone.
The age of your credit accounts is one of the variables that play a part in your final credit score. While this number is not as weighted as credit history or debt ratio, it still plays a strong role in influencing whether you will get a positive credit score or not. One thing age of accounts tells credit researchers is it is an indicator of the age of the individual holding the accounts. If the person being evaluated has very young accounts, there is a higher statistical probability that he or she is a young person. And young people are statistically more prone to take risks with their credit compared to older citizens.
From the lender’s perspective, there is a higher level of trust in an individual who has a number of accounts that have been active for many years. The good relationship implied by the age of those accounts bodes well that this person will be a good credit citizen if a new account is given as well. Therefore, people with long history of established accounts simply represent less risk to a lender. And risk management is what the credit score is all about.
Credit Aging – The True Meaning of Age
Experts in the credit industry speak of a credit report’s age. This is not a number based on when your credit report was created many years or decades ago. The age of your credit report is a more complicated value than that but it is a value that has a significant impact on your credit score.
The age of your credit report is actually the age of your oldest active credit account that is being reported on in your credit file. The software uses the “date opened” field of your credit information, which is information that the lender provided to the credit bureau. Then using simple math to convert that date to a value, a computation is done to determine how many years and months the account has been open using the current date. This is done for all of your accounts. The account that is the oldest lends its age to the credit report in general and becomes the credit report age.
Are Older or Newer Accounts Better? Your Wise Old Accounts
In addition to the age of your oldest account, the average age of all of the active accounts on your credit report also provide a metric those factors into your credit score. The calculation of average age is as you might expect. The age of each account is calculated as we did above using the current date and the account opening date. Then the ages of all of your accounts are averaged. So if you have two credit card accounts and one is ten years old and the other you have had for 8 years, your average account age is 9 years.
Of course, a credit report is a constantly changing thing. As you add new accounts and others get closed, that average age can swing widely. Just in our illustration, if you open a new account that is only a month old when it enters your credit report, you can see how drastically that changes average account age. So the average age can be so fluid that at times it can even go negative.
Accounts that fall off your report also alter your average. Where you might have had seven accounts last month to average, suddenly you have six and the results change your average age. Now, the account age is not the most important variable in your credit score. It still makes an impact but lower than other variable like debt level and delinquencies. That lower value helps to mitigate how much the variations in account age will throw off your credit score so the final score is still an accurate representation of your creditworthiness.
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