If you have a steady income but a short credit history, you are viewed as somewhat of a risk because you have no track record for lenders to evaluate. A short account history indicates you don’t have much experience managing a credit account and may be unreliable when repaying debts.
This lack of credit can impede your ability to find a home, increase your interest rates on loans, and result in higher utility deposits. So, let’s take a closer look at how a short credit history is defined and how to improve your creditworthiness.
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What is a short credit history?
Your Fair Isaac Corporation (FICO) score is calculated by pulling information from your credit reports so lenders can determine the likelihood that you will repay a loan. This score affects the amount you can borrow, the length of time you have to pay it back, and the interest rate that will be attached.
To be fully scorable, you have to have a minimum credit age of six months. Of course, since this is your starting credit score, it puts you at the bottom of the score sheet. Anything less than two years is considered a short credit history.
Once you have established between two and four years of credit, lenders will better understand how well you manage your credit accounts. A credit age of five years will raise your score as long as you’ve been managing your accounts well.
After seven to ten years of good management, you’ll reach the top of the score sheet and begin to reap the benefits of having a good credit score.
How is credit history length calculated?
Besides the overall credit history length, other aspects factor into your FICO Score. So let’s get a better understanding of how credit history length is determined.
Age of your oldest account
The age of your oldest account is equivalent to the age of your credit report. All of your accounts report the month and year they were opened to the credit bureaus. The age of the account itself is determined by the number of months and years it has been open.
You may have had an account older than that one, but it most likely has aged off of your credit report if it’s been closed. Therefore your credit age is based on what’s currently being reported to the credit agencies. Keeping this older account in good standing will positively affect your score.
Age of your newest account
When you open a new account, you haven’t yet demonstrated how well you will handle it, even if you are in good standing with your older accounts. Because it’s a young account, it will negatively affect your score, lowering the average credit age. Before opening a new account, consider your financial situation and decide if a new account will help you reach your credit goals.
Average age of accounts
Another decisive factor that figures into your credit score is the average age of accounts. This measurement is merely the average age of your accounts based on the dates they were opened. To give you an example, let’s say you have two accounts. One has been open for 3 years and the other for 6 years. Your average age of credit history then becomes 4.5 years.
How does a short credit history affect my fico score?
While your length of credit history only makes up 15% of your Fico Score, it still has a significant impact on how lenders view you. Lengthy credit history is seen as much more favorable than short credit history. Your Fico score considers three things when calculating the length of your history.
The first is the amount of time your accounts have been open. That includes the age of your oldest and newest account and the overall average age of all open accounts. Next is the length of time certain accounts have been open, and lastly is how long it’s been since an account was used.
Those three aspects determine how much of a risk is being taken by extending you a line of credit. Lenders are cautious, loaning money to those with a short credit history.
How to improve short credit history
Although it may seem like the only thing to do is patiently wait for the years to pass and make on-time payments, there are a few actions you can take to improve your short credit history.
Become an authorized user
Talk to a family member or friend who has established good credit history and ask if they will add you to one of their older credit card accounts as an authorized user. It may seem like a big ask, but if they’re willing to help you build your creditworthiness, it’s a great way to raise your FICO Score.
Being added to their account means their credit history will be reflected on your credit report. That will assist with getting approved for your own account down the line. Just be sure that it’s a credit card that reports authorized users to the credit agencies as some card companies do not.
Keep old accounts open
Your credit score is based on your payment history, credit history, and credit utilization. Your new accounts and your overall credit mix are also part of your FICO Score calculation. Closing an account will harm your length of credit history and the amount of available credit.
If you close an account you’ve had for years, the effect on your score will be much more impactful than if you closed a newer account. Closing an account of any age will also affect your credit utilization ratio.
Your available credit will also decrease as you’ve now removed a line of credit. The balances on your other accounts now take on a larger portion of what you have available to use.
If you only have a few accounts and close one of them, your credit mix will also be impacted. For instance, if you had one credit card and two loans and you closed the credit card, you no longer have a mix of multiple credit accounts. That is another factor lenders will consider.
Avoid opening new accounts
As we discussed earlier, opening a new account can negatively impact your credit score. That is the reason why your mortgage broker will tell you not to apply for or open new accounts when you’re in the process of buying a house.
They don’t want your score to drop, as that will affect whether or not you get the loan approved. Opening a new account can temporarily lower your credit score. That is especially true if you use up a good portion of the new line of credit, increasing your credit utilization.
Having a short credit history means the average age of your credit is low, and it will get lower once a new card is added. However, if you have a short credit history full of older accounts, that can actually raise your score.
Apply for a secured card
A secured credit card requires a cash deposit upon opening the account. That security deposit reduces your risk as if you’re unable to pay the bill; the money is taken from your deposit. After six months to a year of responsible use, you will be able to improve your score.
Many credit card issuers allow you to transfer the secured line of credit to a new unsecured card without opening a new account. That looks great when lenders look at your length of credit history.
You may have bills you regularly pay that aren’t reported to credit agencies due to the fees involved in alerting the credit bureaus. These bills can be rent, utilities, phone bills, and more.
It may seem unfair that you already have a good length of credit history with these companies, but it isn’t factored into your credit score. A bill reporting service levels the playing field by securely connecting to your bank account and identifying rent and utility payments.
They then send their findings to each credit reporting agency, and in a matter of weeks, these payments will begin to show on your credit report. Keeping up with these payments will help you build a credit-worthy profile without taking out additional lines of credit.
Get a credit builder loan
A credit-builder loan has one specific purpose, and that’s to increase your credit score. If your credit age is young, you may want to apply for this loan and pay off the loan by making monthly installments.
The lender reports these payments to the credit agencies, which in turn builds your credit. Once the payments are completed, the money is deposited into a savings account for you.
In essence, the credit-builder loan is a series of deposits into a savings account that will improve your credit rating over a short time. This loan is a great option for those with a poor or short credit history to rebuild or establish credit. Although you will pay interest on this loan, the effect on your FICO score is often worth it in the long run.
Stay on top of your credit report
Now that you have the knowledge necessary to build your short credit history, you must frequently check your credit report. One major reason is accuracy.
You’ll want to ensure that the information being reported is correct and that no fraudulent accounts have been opened under your name. Should you find any inaccuracies, you can take the needed steps to fix them.
You also will gain a better understanding of how your length of credit history impacts your score. As time passes, you’ll see your rating rise, and you’ll be able to make more informed decisions regarding your credit.
Annualcreditreport.com allows you to get a free annual credit report from Equifax, Transunion, and Experian. You can request each report one at a time or get all three sent to you at once, making it easier to stay on top of your credit score.
Don’t wait to lengthen your credit history
Your length of credit history is important to your overall credit health and shouldn’t be ignored. There are options available for those with a short credit history to improve their worthiness as a borrower.
Procrastinating will only hurt you in the long run and impact your ability to rent an apartment, buy a home, purchase a vehicle, and lots more. Take action today and start utilizing other methods to lengthen your credit history so that you’re able to easily obtain your personal goals.
What is a good length of credit?
Seven years is considered a good credit history length. It takes seven years for negative items to fall off your credit report.
What is considered a short credit history?
Less than two years is considered by most lenders to be a short history.
How do I get rid of short credit history?
Become an authorized user on a trusted friend or family member’s credit card account. The credit card should have an established history of five years or more.