Why Your Credit Score Increases with Age
It takes time to build credit, but some Americans are able to develop excellent credit scores early in their adult lives. But on average, there is a 91 point gap in FICO scores between the youngest and oldest age groups. Why does credit get better with age, and what can you do to speed up the score-building clock?
There are several factors that make up your credit score, including the length of your credit history, your credit utilization, and the versatility of your credit portfolio. Young adults struggle to score well in these areas because:
- Many young adults have limited income. They cannot afford high-value loans that help boost their available credit.
- They sometimes rely on credit cards to survive due to their limited income. Thus their credit utilization ratio remains high (ratio of debt to available credit).
- Many are paying off student loans from college, reducing their available income to pay off other lines of credit. The maximum debt to income ratio for a home loan is around 43%, which may not be possible with high student loans.
- They cannot qualify for large lines of credit until they have proven their ability to pay back smaller lines of credit.
- They simply haven’t had enough time to develop a long-standing credit history.
Another factor may be that many Millennials are focused on saving, not building credit. A new Bank of America survey shows 16% of adults age 23 to 37 have $100,000 or more in savings, up from 8% in 2015. 47% said they had at least $15,000 in savings. Millennials are focused on the future, which in many ways is more valuable than a high credit score. For instance, having a high down payment for a house may make up for a person’s limited credit history.
You cannot make time go any faster, but you can take steps to build your credit quickly. Start with a credit card with a low credit limit or secured credit card. Pay for your daily expenses on the card, and pay off the balance in full and on time at the end of each month. Repeat this for 6-12 months and you may see a significant boost in your credit score. If you have outstanding debt, pay it off as quickly as possible. Keep your credit card accounts open even if you no longer need the card. This will help build a lengthy credit history. As long as you practice smart money management, you can improve your credit score at a young age.