Credit Mistakes People Make
The longer your track record of managing credit wisely, the more comfortable lenders will be extending credit to you. Fair Isaac says it considers both the age of your oldest account as well as the average age of all your accounts. In total, the length of your credit history will account for 15 percent of your score.
The good news: Most of us have a fairly lengthy history with credit. In fact, the average consumer’s oldest credit relationship—be it an auto loan or credit card—is about 13 years. Roughly 20 percent of consumers have credit histories that extend beyond 20 years. But canceling an old credit card could reduce that history. Let’s say you carry three credit cards. One is 13 years old and the other two are five years old. But you’re thinking about canceling your oldest card because you never use it. Closing out the 13-year-old card account would do two things to your credit history. First, it would shorten your oldest credit relationship to just five years. Plus, it would
shorten your average credit history, which is currently 7.7 years, by more than two years. This is another reason why it would be a mistake to automatically close out an old credit card account.
Seeking out new card accounts could also hurt your score by shortening your average credit history. For instance, if you have two cards that are five years old, and all of a sudden you apply for and get five new cards, your average credit history would drop from five years down to just over two.
Creditors are always fearful of someone going on a credit binge. Any indication that you’re on the prowl for tons more credit is a clear-cut sign that you may be in financial trouble. That’s why 10 percent of your FICO factors in whether you are seeking new credit, and how many new credit relationships you’re seeking. FICO also considers how long it’s been since you last opened a new account. This is one reason why, contrary to popular belief, consumers need to be careful when flipping into and out of various credit cards in search of the absolute lowest interest rate.
You may save a few bucks by moving to your seventh new card in two years, but you might damage your FICO score by bouncing around too much too often. Every new credit card is a request for new credit, even if your intent is simply to move your card balances to the lowest possible rate. (Remember that constantly opening new card accounts and closing old ones will also shorten your credit history.) Having said that, FICO does recognize that shopping for the lowest rates when it comes to things like mortgages or auto loans is good consumer behavior. So if you’re mortgage-rate shopping, and potential lenders make numerous inquiries about your credit score, don’t worry. So long as you shop for rates in a fairly tight window of time— say, a month or so—FICO won’t penalize you. “Also, the score does not count requests a lender has made for your credit report or score in order to make you a ‘preapproved’ credit offer,” Fair, Isaac, points out. But just to play it safe, don’t be too slow when it comes to researching rates. Don’t stretch the process out over several months.