How Important Is Length Of Credit History With A Credit Card?
Have you ever heard some people say you should never cancel a credit card, as it will hurt your credit history? Others claim you should keep one credit card open forever, in order to extend your credit history. Do these theories make any sense? To find out, let’s take a look at how important your length of credit history is to your credit score.
How credit scoring uses your credit card account history
The most popular credit scoring formula is from the Fair Isaac Corporation, or FICO. While the exact formula that it uses to calculate your credit score has always been a secret, it does disclose the basic parameters.
- 35% of your score is derived from your payment history.
- 30% of your score is based on your amounts owed.
- 15% is from the length of your credit history.
- 10% is derived from your new credit.
- 10% is based on your credit mix.
So of all of these factors, only 15% of your credit score is based on the length of your credit history. Furthermore, the formula uses several components to come up with this 15%. One is how long your credit accounts have been opened, including the age of your oldest and newest accounts. Another is the average age of all your accounts. And finally, it looks at how long specific credit accounts have been established, and how long it has been since you have used certain accounts.
So within the 15% of your score that is derived from your account history, only a portion of that is made up of your length of credit history. So it’s likely that the length of time your credit card account remains open makes up significantly less than 10% of your FICO score. In contrast, your payment history and your amounts owed are 35% and 30% respectively, at least twice as important as all of the factors combined that make up your length of credit history.
Should you keep your accounts open to increase your length of credit history?
So even though your length of credit history is not a major factor in your credit score, how should it affect your decisions when it comes time to renew your accounts? Credit cards that have an annual fee can only be justified when you are receiving enough value from their rewards and benefits to equal or exceed its costs. Furthermore, you don’t want to pay for a card with an annual fee if you are able to receive similar value from one or more other cards without an annual fee. And since there are plenty of credit cards with no annual fee, there is no need to pay an annual fee for a card you don’t use, just to keep the average age of your accounts slightly longer.
The only possible exception will be for those who have a very limited credit history, such as young adults, recent immigrants, and those who have avoided opening credit cards or receiving loans. In this case, it is important to establish a long credit history, and you can do that easily by keeping open multiple credit card accounts that have no annual fee.
Don’t miss the point
Since the actual FICO score is a mystery, it’s possible for credit card experts to debate all day long the importance of your average length of credit history. But if your goal is to maintain excellent credit, the debate is not worth having. Instead, focus on the two most important factors, keeping your level of debt low, and making every payment on-time. To keep you debt low, you should have as low of a debt-to-credit ratio as possible, which is the total amount of your outstanding balances divided by the total amount of your credit extended. And in order to keep your payment history perfect, you should make sure to utilize any payment reminders or automatic electronic payment features offered by your credit card issuer. If you do these two things, it will be nearly impossible not to have excellent credit.
Another thing that you should keep in mind is that any score of 740 or above is considered to be not just excellent, but equal. There is no A+++ or “very excellent” credit score, even if you reach 780 or even 820. In fact, there is very little point in trying to get your credit score higher than 740, other than to have a small margin of error should you happen to make a mistake in the future. Opening or closing a single account will not result in your score moving by more than a few points, which it will do anyway each month due to all of the myriad of factors that make up your score. In addition, you will have a different FICO score from each of the three major consumer credit bureaus, since each applies its own data to the credit scoring formula.
By considering the limited impact of keeping a credit card open, you can know when the right time comes to close one of your accounts.