The Impact of Having Old Credit History
Typically, the longer a person has had credit, the higher credit score will be. A longer credit history provides more information to the lender on the long-term financial behavior of the person. Of course, this is assuming that they don’t have a history of late payments, delinquencies or maxed out balances.
To generate a credit report with a credit score, one should have at least one active account that has been existing for at least six months. You shouldn’t expect to get an 800-credit score if you’re new to credit, but you can achieve a credit score high enough to qualify for most credit cards and loans. Young adults have lower credit scores in general as they are just establishing their credit history.
How to preserve your credit age? Be careful about closing bad accounts, especially your oldest credit account. You might be tempted to close them due to delinquency reports but most of this negative information will fall off the credit report after seven years. The longer it is inactive, a closed account will impact your credit score less and less.
Applying for a new credit might temporarily affect your credit score. When a lender makes a hard credit inquiry – meaning you allow a lender to check your credit report – this will negatively impact your new credit score which accounts to 10% of your credit report. Lenders don’t want to see lots of hard credit inquiries which might indicate that the consumer is desperate for a loan or preparing for a big splurge.
Credit score providers, such as FICO, only takes into account hard inquiries and new credit lines for the past 12 months. It is therefore wise to open only two new credits in a year if you need to. If you plan to take a mortgage or buy a car, multiple inquiries for a car or mortgage loan is considered a single inquiry as long as you keep your search within 30 days.
Soft inquiry (also called soft pull), is when an institution pulls your record only for background checks, and usually without your approval. Unlike hard credit inquiry, soft pull doesn’t affect your credit score.
Credit mix – meaning the different type of credits you own (credit cards, mortgages, store accounts, installment loans) – makes up the last 10 percent of your score. Although quite vague, a person who has all sorts of credit and able to repay them indicates a more reliable and mature borrower.
The Bottom Line
If you are planning to make any big purchase that will require you to take out a loan, it is recommended to check your credit score six months in advance. This will give you time to correct any errors, if any, and improve your score. Despite the popular misconception that people with no or little income has poor credit score, this is just a myth. A person’s income has nothing to do with their credit score. The same way that age, race, religion, national origin, family obligations, children you have, your occupation, work or health history has NO effect on your credit score.
At the end of the day, if you manage your credit responsibly, you will be rewarded for good credit behavior.